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Consider a project with free cash flows in one year of $ 1 2 1 , 2 0 0 or $ 1 7 8 ,
Consider a project with free cash flows in one year of $ or $ with each outcome being equally likely. The initial investment required for the project is $ and the project's cost of
capital is The riskfree interest rate is
a What is the NPV of this project?
b Suppose that to raise the funds for the initial investment, the project is sold to investors as an allequity firm. The equity holders will receive the cash flows of the project in one year. How much
money can be raised in this waythat is what is the initial market value of the unlevered equity?
c Suppose the initial $ is instead raised by borrowing at the riskfree interest rate. What are the cash flows of the levered equity, what is its initial value and what is the initial equity according
to MM
a What is the NPV of this project?
The NPV of this project is $Round to the nearest dollar.
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