What risks are present in the IWPI-Spain project? How do they affect the value of the project?

What will be an ideal response?

The primary source of risk is the business risk of selling wooden furniture in Europe. The expected free cash flows of the project are taken from a probability distribution that represents the possible ups and downs of the business due to cyclical fluctuations in Europe as well as idiosyncratic events particular to IWPI. The systematic business risk of the project is reflected in the fact that the beta of the project is 1.2 . The beta is the perceived covariance of the return on the project with the return on the world market portfolio divided by the variance of the return on the world market portfolio. Thus, assuming an equity risk premium of 5.5%, the expected free cash flows are discounted by an all-equity required rate of return that is 6.6 percentage points above the risk free interest rate.