Consider a project with free cash flows in one year of $$145,800$ or $$184,600,$ with each outcome being equally likely. The initial investment required for the project is $$97,000,$ and

the project's cost of capital is $18\%.$ The risk$-$free interest rate is $6\%.$

a$.$ What is the NPV of this project?

b$.$ Suppose that to raise the funds for the initial investment, the project is sold to investors as an all$-$equity firm. The equity holders will receive the cash flows of the project in one

year. How much money can be raised in this way$-$that is$,$ what is the initial market value of the unlevered equity?

c$.$ Suppose the initial $$97,000$ is instead raised by borrowing at the risk$-$free interest rate. What are the cash flows of the levered equity, what is its initial value and what is the initial

equity according to MM$?$

b$.$ Suppose that to raise the tunds tor the in$$tial investment, the project is sold to investors as an all$-$equity tirm. Ine equity nolders will receive the casn tiows of the project in one

year. How much money can be raised in this way $$ that is$,$ what is the initial market value of the unlevered equity?

The initial market value of the unlevered equity is $$140,000.($Round to the nearest dollar.$)$

c$.$ Suppose the initial $$97,000$ is instead raised by borrowing at the risk$-$free interest rate. What are the cash flows of the levered equity, what is its initial value and what is the inial

equity according to MM$?$

The cash flows of the levered equity and its initial values according to MM are: $($Round to the nearest dollar.$)$

Date $0$

Initial Value

Debt

Levered Equity

Date $1$

Cash Flow Strong Economy

Cash Flow Weak Economy

$$97,000$

$$$

$

$$$

$$$

$