Question: A company does not know what its borrowing rate is going to be . If there is a recession, then the firm will get an

A company does not know what its borrowing rate is going to be. If there is a recession, then the firm will get an interest-free loan. If normal market conditions persist, then the borrowing rate will be 5%. If there is an inflationary boom, then the rate is going to be 10%. The probabilities of recession and normal market conditions are 10% and 70% respectively. The company is evaluating a project that costs 1,700 immediately and generates 2 yearly cash flows of 1000 starting a year from now.
a. What is the NPV of the project under each scenario?
b. What is the probability of an inflationary boom?
c. What is the overall NPV of the project after accounting for the uncertainty? d. Will the firm undertake the project given this information? Why?
e. How is the firm going to finance the project?

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