Question
A company is considering an investment project that generates a cash flow of $2,100,000 next year if the economy is favorable but generates only $800,000
A company is considering an investment project that generates a cash flow of $2,100,000 next year if the economy is favorable but generates only $800,000 if the economy is unfavorable. The probability of favorable economy is 60% and of unfavorable economy is 40%. The project will last only one year and be closed after that. The cost of investment is $1,450,000 and the company plans to finance the project with $470,000 of equity and $980,000 of debt. Assuming the discount rates of both equity and debt are 0%. What are the expected cash flows to the company's creditors and shareholders if the company invests in the project?
$980,000 to creditors and $672,000 to shareholders | ||
$908,000 to creditors and $672,000 to shareholders | ||
$908,000 to creditors and $1,120,000 to shareholders | ||
$0 to creditors and $1,120,000 to shareholders | ||
$908,000 to creditors and $0 to shareholders |
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