A real investment opportunity costs £1m. It generates an expected risky revenue cash flow of £100,000 each year, but requires annual risk free maintenance costs of £10,000. Assume these cash flows continue indefinitely. Finally, the project gives you access to cheap government financing below the current market rate. You estimate that the financing benefits have a net present value of £50,000. The risk free interest rate is 5%, and the expected rate of return on the market index is 12%. The beta-risk of the revenue stream is 0.75.

a) Work out whether the project is worthwhile. State all additional assumptions made.

b) You are a bit uncertain about the beta-estimate for the revenue stream. The equity of a firm in

the same industry trades with a beta of 2. This firm has a debt-equity ratio of 1. The debt is nearly risk free. Work out whether the project is worthwhile given this additional information

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