ABC Inc.. is an all-equity firm whose current business involves manufacturing and selling software. The company is blessed in that it operates in capital markets that are perfect, that is, there are no taxes or bankruptcy costs. The current weighted average cost of capital (WACC) of ABC, Inc. is 8.50%, and its equity beta is 0.90. ABC, Inc. is considering penetrating the wine industry, and would like its total value to consist of 70% software and 30% wine. The wine project requires a $800,000 investment at t = 0 and will yield $150,000 a year for the following 40 years, starting a
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If you're financing the investment with Equity:
CAPM=> using industry beta (a good source is http://people.stern.nyu.edu/adamodar/)
Eg. Rfr = 3 %,unleveraged industry beta bevarges = 0,88, risk premium = 6 %
Required rate of return = 8,28 %
NPV = 936.409 => positive so buy (CF0 = -800.000 ) => invest
IRR = 18,73 % > 8,28 % => invest