Should the company undertake the expansion

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Auto-Parts Ltd. manufactures car parts, and management is considering an expansion of its existing operations at the cost of $600 000. It expects this expansion to generate additional cash inflows for the next 10 years as follows: $100 000 per annum in Years 1 - 5 and 130 000 per annum in Years 6 - 10.

The company's analyst has made the following estimates:

i) The systematic risk of the company's assets is 0.75

ii) The risk-free interest rate is 11 per cent p.a.

iii) The expected rate of return on the market portfolio is 15 per cent p.a.

Question 1: Assuming that, there is no company income tax, should the company undertake the expansion? Show all the working steps of all the calculations leading to your conclusion.

Reference no: EM132606462

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