Consider a project with free cash flows in one year of $145,804 or $

165,601, with each outcome being equally likely. The initial investment required for the project is $95,113, and theproject's cost of capital is 20 %. Therisk-free interest rate is

6%.

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 waylong dash

that is, what is the initial market value of the unleveredequity?

c. Suppose the initial $95,113 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?

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 waylong dashthat is, what is the initial market value of the unleveredequity?

c. Suppose the initial $95,113 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?

a. What is the NPV of thisproject? The NPV is $______ (Round to the nearestdollar.)

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 waylong dashthat is, what is the initial market value of the unleveredequity?

The initial market value of the unlevered equity is $_____. (Round to the nearestdollar.)

c. Suppose the initial $95,113 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?

The cash flows of the levered equity and its initial values according to MMare: (Round to the nearestdollar.)

Date 0Date 1

Initial ValueCash Flow Strong EconomyCash Flow Weak Economy

Debt$95,113$_________$___________

Levered$_____$_________$___________

Equity