CMA Final · Strategic Financial Management · Asset Pricing Theories
The risk-free rate is 7%. The market risk premium is 6%. Dhruv Ltd has a beta of 0.9, and a project of the same risk requires an outlay of ₹10,00,000 that returns a perpetual annual cash flow of ₹1,20,000. Using CAPM for the discount rate, what is the project's NPV?
The NPV is about minus ₹32,258, since the CAPM rate is 12.4% and the perpetuity is worth ₹9,67,742 against an outlay of ₹10,00,000. This does not match the listed options, so the item is flawed.
- A₹-1,00,000
- B₹-81,967Correct
- C₹-2,00,000
- D₹2,00,000
Explanation
Required return = 7% + 0.9x6% = 12.4%. PV of perpetuity = 1,20,000/0.124 = ₹9,67,742. NPV = 9,67,742 - 10,00,000 = -₹32,258. Recomputed value does not match any option exactly.
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