Solution-What is the internal rate of return of the

What is the internal rate of return of the sunscreen project

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Reference no: EM132420411

Consider Orbison Sunglasses from question (1). The company considers expanding its product range by offering sunscreen as well as sunglasses. Orbison Sunglasses estimates that constructing a sunscreen factory will require an investment of $100 million. It estimates that selling sunscreen will create total cash flow of $12 million next year that will grow by 1% annually forever. Assume the risk-free rate is 5% and the market risk premium is 4% as before. Assume further that the firm is fully equity financed.

What is the internal rate of return of the sunscreen project?
Assume Orbison estimates the risk of the new project to be in line with its existing
business, so that the beta is 1.5. What is the NPV of expanding into the sunscreen
business? Should Orbison Sunglasses expand its business?
Now assume Orbison Sunglasses misjudged the riskiness of the sunscreen business, and sunscreen activities actually have a beta of 2.5. What is the NPV of the project now?
Should Orbison Sunglasses expand its business?
Perform a sensitivity analysis by drawing a graph with the discount rate on the horizontal axis and NPV on the vertical axis (use Excel).

Reference no: EM132420411

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What is the internal rate of return of the sunscreen project

Reference no: EM132420411

Reference no: EM132420411

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