Consider a project with free cash flows in one year of $144,100 or $177,100 with each outcome
Question:
Consider a project with free cash flows in one year of $144,100 or $177,100 with each outcome being equally likely. The initial investment required for the project is $90,100, and theproject's cost of capital is 20 %. Therisk-free interest rate is 7%
a. What is the NPV of thisproject?
b. Suppose that to raise the funds for the initialinvestment, the project is sold to investors as anall-equity firm. The equity holders will receive the cash flows of the project in one year. How much money can be raised in this waythat is, what is the initial market value of the unleveredequity?
c. Suppose the initial $93,100 is instead raised by borrowing at therisk-free interest rate. What are the cash flows of the leveredequity, what is its initial value and what is the initial equity according toMM?
Expert Answer:
a Calculation of the NPV of the project The NPV of the project is the present value of the expected ... View the full answer
