1) your are thinking of buying a new machine for $112,000 that will save 21,000 per year for 8 years. if cost capital is 12% what is the net present value (NPV) of buying the new machine? 2) Assume that the risk-free rate is 5% and that the market risk premium is 6%. What is the required return on the market, on a stock with a beta of 1.0, and on a stock with a beta of 1.2?

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1) your are thinking of buying a new machine for $112,000 that will save 21,000 per year for 8 years

Management Dec 07, 2020

1) your are thinking of buying a new machine for $112,000 that will save 21,000 per year for 8 years. if cost capital is 12% what is the net present value (NPV) of buying the new machine?

Assume that the risk-free rate is 5% and that the market risk premium is 6%. What is the required return on the market, on a stock with a beta of 1.0, and on a stock with a beta of 1.2?

Expert Solution

1) PFA

Computation of Required Rate of Return on Market:

Required Rate of Return on Market = Risk-free Rate + Beta*Market Risk Premium

When Beta of Stock is 1.0:

Required Rate of Return on Market = 5%+1.0*6% = 5%+6% = 11%

When Beta of Stock is 1.2:

Required Rate of Return on Market = 5%+1.2*6% = 5%+7.2% = 12.2%

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