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AlphaGamma may select one of two mutually exclusive projects A and B, each with a CAPEX of $100,000. There is 50% probability project A has
AlphaGamma may select one of two mutually exclusive projects A and B, each with a CAPEX of $100,000. There is 50% probability project A has PV of $150,000 and 50% chance it has PV of $80,000. Also, there is 50% chance B has PV of $200,000 and 50% chance its PV = 0. The firm has a debt payable right after the investment is made, and with principal value of $50,000. Assume risk neutrality & equityholders cant observe the PV before making the investment. Which project has the highest NPV? Suppose owners finance the new project with new equity which project is the best for them? Explain why you may get different answers to these questions.
AlphaGamma may select one of two mutually exclusive projects A and B, each with a CAPEX of $100,000. There is 50% probability project A has PV of $150,000 and 50% chance it has PV of $80,000. Also, there is 50% chance B has PV of $200,000 and 50% chance its PV = 0. The firm has a debt payable right after the investment is made, and with principal value of $50,000. Assume risk neutrality & equityholders cant observe the PV before making the investment. Which project has the highest NPV?
Suppose owners finance the new project with new equity which project is the best for them? Explain why you may get different answers to these questions.
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