A firm wants to undertake an investment project which costs N$25,000, which it wants to finance through
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Question:
A firm wants to undertake an investment project which costs N$25,000, which it wants to finance through a bank loan. The project has an 80 percent probability of success. If it fails the firm will get a cash flow of N$10,000 and will be required to pay an amount of only N$ 8,000 to the bank. The bank has a required rate return of 25%. (a) What will be the banks loan rate? Will the bank be willing to lend at this rate? (2 marks) (b) Will the firm be willing to participate in this contract? Explain. (3 marks) (c) How much will be the banks uncertain incomes? What will be the expected value of these incomes? (2 marks)
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