The Jacobs Company is financed entirely with equity. The beta for Jacobs has been estimated to be 1.0. The current risk-free rate is 10 percent and the expected market return is 15 percent.
a. What rate of return should Jacobs require on a project of average risk?
b. If a new venture is expected to have a beta of 1.6, what rate of return should Jacobs demand on this project?
c. The project in question requires an initial outlay of $9 million and is expected to generate a 10-year stream of annual net cash flows of $1.9 million. Calculate the NPV of the project using Jacobs required return for projects of average risk.
d. Calculate the NPV of the project using the risk-adjusted rate computed in part b.