Reference no: EM133179925

Question - Suppose Smith & Nephew plc, the British multinational medical equipment manufacturing company, is considering investing in a new production facility. The project requires an initial investment of $50m. The facility is expected to generate cash flow of $8m in the first year, and cash flow is forecast to grow at a rate of 2% per year. The project life is 10 years, and at the end of the project the equipment will have no residual value. The cost of capital for the company is estimated to be 7%.

Explain the net present value (NPV) approach, calculate the NPV of the investment, and comment on the value you obtain.

Compute the internal rate of return for the project, and the payback period. Compare and contrast these methods with the net present value method.

The shares of Smith & Nephew are listed on the London and New York stock exchanges. Using monthly returns on Smith & Nephew shares listed in New York, and on the New York stock market index (for the period April 2017 to March 2022), and the methods explained in Units 3 and 4 and in your key text by Hillier et al, the estimated beta for Smith & Nephew is obtained as 0.71. The yield on US government bonds with maturity of at least 10 years is 2.6% (March 2022, treasury.gov). The expected market risk premium for the US is 5.96% (Hillier et al, Table 9.3). M421 Corporate Finance Session Three 2022 Explain the capital asset pricing model, and use the capital asset pricing model to obtain the estimated cost of capital for Smith & Nephew. Comment on the value you obtain.