Projects [7]

A start-up company considers two investment projects that require a $90 investment.

Both are zero NPV projects (hence, the value of the project is $90). Only one project can be implemented. Part of the necessary funds are to be acquired through a zerocoupon debt issue, with face value of $85. The remainder is collected through an equity issue. The specifics of the two projects are Project A:

Final value = <

• Project B:

Final value

•{

110 with probability 0.8 80 with probability 0.2 150 with probability 0.5 40 with probability 0.5 1. Which project has the highest expected return?