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A firm would like to borrow $900 for one year from a bank to invest in a project. The project has a 40% chance of
A firm would like to borrow $900 for one year from a bank to invest in a project. The project has a 40% chance of a $375 time 1 cash flow and a 60% chance of a $2000 time 1 cash flow. The firm has no "assets-in-place," and therefore will only be able to use the cash flows from the project to make payment on the loan. The following table shows the cash flows at time 1: Probability Assets-in-place Project Total 40% chance $0 $375 $375 60% chance $0 $2000 $2000 What interest rate will the bank need to charge on the $900 one-year loan to earn an expected return of 7%? Return to the facts of the previous problem. However, now assume the firm has assets-in-place which produce cash flows of $200 at time 1. The following table shows the cash flows at time 1: Probability Assets-in-place Project Total 40% chance $200 $375 $575 60% chance $200 $2000 $2200 What interest rate will the bank need to charge on the $900 one-year loan to earn an expected return of 7%
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