Your Own Company Has Been Very Successful In Producing And Selling Rocket Engine (1)

Your own company has been very successful in producing and selling rocket engines. Given that airplane engines are not that cheap, and the airline industry is extremely sensitive to the market, the beta of your company is 1.75. The market risk premium (the average/expected difference between the market return and the risk-free rate) is 4.25% and the return on a long-term government bond is 3.50%. You have discovered an exciting opportunity to set up a new wireless device that will cover a whole state in the U.S. with one station. This project will require a $4 billion investment, spread out equally between now (t = 0) and the end of this year (t = 1), and will produce $520 million dollars in perpetuity starting in year 2 (t = 2). Should you proceed with this project?

It can’t be decided until the systematic risk of the project can be quantified.

It can’t be decided even if the systematic risk of the project can be quantified.



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