Help Financial Questions

Pippinpro SG

You consider an investment project which has an investment outlay of 100000 and generates a risky cash flow of 28000 each year for 5 years/ You estimate that the beta of the project is 1.2. The risk free rate of return is 5% and the expected rate of return on the market index is 10%. Should the project be undertaken if you use a payback method of 4 years? Should it be undertaken if you use an NPV method?

I understand the pay back method part. But i got problem with finding the cost of capital in order to get NPV.

Assume that CAPM formla: E(R)=rf + b(1+rf)

I don't see the relationship to get cost of capital.

Anyone Help help help.

deepak.c SG

There is an error with your formula.

E(R) = rf + b (rm - rf)

5 years = 3,485

Pippinpro SG

There is an error with your formula.

E(R) = rf + b (rm - rf)

5 years = 3,485

oh k.. then how do i find the cost of capital to discount my Cash flows??

deepak.c SG

E(R) = risk free rate + beta x (market rate - risk free rate)

http://www.moneychimp.com/articles/valuation/capm.htm

It's a very straight forward question.