Draw a figure like Figure 2.1 to represent the following situation.

a. A firm starts out with $10 million in cash.

b. The rate of interest r is 10 percent.

c. To maximize NPV the firm invests today $6 million in real assets. This leaves $4 million which can be paid out to the shareholders.

d. The NPV of the investment is $2 million.

When you have finished, answer the following questions:

e. How much cash is the firm going to receive in year 1 from its investment?

f. What is the marginal return from the firm’s investment?

g. What is the PV of the shareholders’ investment after the firm has announced its investment plan?

h. Suppose shareholders want to spend $6 million today. How can they do this?

i. How much will they then have to spend next year? Show this on your drawing.