Consider a project with free cash flows in one year of $90,000 in a weak economy or $117,000 in a strong economy, with each outcome being equally likely. The initial investment required for the project is $80,000, and the project's cost of capital is 15%. The risk-free interest rate is 5%.

What is the NPV for this project?

Suppose that to raise the funds for the initial investment the firm borrows $80,000 at the risk-free rate. What would be the cash flow that equity holders will receive in one year in a weak economy? What would be the cash flow that equity holders will receive in one year in a strong economy? What would be the value of the firm's levered equity from the project?

What would be the cost of capital for the firm's levered equity?