CFA Practice Question

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CFA Practice Question

A project has the following expected cash flows:

Time | Cash Flow ($)
0 | (125,000)
1 | 100,000
2 | 200,000

If the risk-free interest rate is 4 percent, expected inflation is 3 percent, the market risk premium is 8 percent and the Beta for the project is 1, the investment's net present value (NPV) is closest to ______.
A. $113,000
B. $123,725
C. $139,000
Explanation: The opportunity cost of capital for the investment would be the risk-free rate + the market risk premium x Beta. 4% + (8% x 1) = 12%. The NPV equals the present value (at time = 0) of the future cash flows discounted at the opportunity cost of capital (12%) minus the initial investment, or $123,725 ( = - 125,000, = 100,000, = 200,000, I = 12, solve for NPV = 123,725).

User Contributed Comments 3

User Comment
Marinov So why do we need inflation rate here?
ANBobby to trick you
Mhmdjamal obtaining opportunity cost of capital(Rate of discount) by using asset pricing model
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