CAPM and Valuation. You are a consultant to a firm evaluating an
expansion of its current business. The cash-flow forecasts (in
millions of dollars) for the project are:
Years          Cash Flow
   0              ?100
 1?10             + 15

Based on the behavior of the firm?s stock, you believe that the beta
of the firm is 1.4. Assuming that the rate of return available on
risk-free investments is 4 percent and that the expected rate of
return on the market portfolio is 12 percent, what is the net present
value of the project?

Using the CAP-M model, r=beta(rm-rf)+rf = 1.4(12%-4%)+4% = 15.2%.

Discounting the cash flows at 15.2% using Excel's NPV function results
in an NPV of -$6.11.  Therefore, you would reject the project.

Sincerely,

Wonko

Sources:  "Principles of Corporate Finance, Fourth Edition" by Brealey
& Myers, McGraw-Hill, Inc. (1991) pp. 161-162

"Go with the cash flow: Calculate NPV and IRR in Excel" Microsft
Corporation (2005) http://office.microsoft.com/en-us/assistance/HA011136321033.aspx