CAPM and Cost of Capital. You are a consultant to a firm evaluating an expansion of its current business. The cash-flow forecasts (in millions of dollars) for the project are as follows:
Years
1-10
Cash Flow
-$100
15
On the basis of the behavior of the firm's stock, you believe that the beta of the firm is 1.4. Assuming that the rate of return available on risk-free investments is 4% and that the expected rate of return on the market portfolio is 12%.
a. What is the project IRR?
b. What is the cost of capital for the project?
c. Does the accept-reject decision using IRR agree with the decision using NPV?