Answer (D) is correct . The cost of capital must be determined in order to calculate NPV. Using the Capital Asset Pricing Model to determine the cost of capital where R equals the required rate of return on equity capital, R F equals the risk-free rate, R M equals the market return, and β equals the β coefficient, then ? R = R + β (R M – R F) R = .05 + 1.8(.10 – .05) R = .14 The net present value of the project is thus the difference between the initial cost and the sum of the present value of an annuity of $12,000 for 10 years at 14% and the present value of $20,000 in 10 years at 14%. The present value factors are found in the tools section of CMA Test Prep. NPV = [($12,000 × 5.216) + ($20,000 × .270)] – $100,000 NPV = $67,992 – $100,000 NPV = $(32,008)
Answer (A) is incorrect because The amount of $(14,544) uses a rate of 9% to discount the net cash inflows of the project.
Answer (B) is incorrect because The amount of $4,944 uses the risk-free rate of 5% to discount the net cash inflows of the project.
Answer (C) is incorrect because The amount of $(37,408) does not consider the NPV of the salvage value of the project at the end of Year 10.
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