Under risk neutrality, a factory can be worth $5C3,000 or $1,000,000 in two years, depending on prod- uct demand, each with equal probability. The appropriate cost of capital is 6% per year. The factory can be financed with proceeds of $500,000 from loans today. What are the promised and expected cash flows and rates of return for the factory (without a loan), the loan, and the levered factory owner?

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