Consider a project with free cash flows in one year of$142,500or$172,500,with each outcome being equally likely. The initial investment required for the project is$96,000,

and theproject's cost of capital is18%.Therisk-free interest rate is11%.

a.What is the NPV of thisproject?

b.Suppose that to raise the funds for the initialinvestment, the project is sold to investors as anall-equity firm. The equity holders will receive the cash flows of the project in one year. How much money can be raised in thiswaythatis, what is the initial market value of the unleveredequity?

c. Suppose the initial$96,000is instead raised by borrowing at therisk-free interest rate. What are the cash flows of the leveredequity, what is its initial value and what is the initial equity according toMM?