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Consider the following situation (Assume Two Period Framework of EFB210 Weeks 1 and 2): Firm starts with an endowment of $10 million in cash.

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Consider the following situation (Assume Two Period Framework of EFB210 Weeks 1 and 2): Firm starts with an endowment of $10 million in cash. The interest rate is 12%. The optimal policy for the firm is to invest $5 million in assets. The NPV of the investment is $2 million. (i) What is the cash flow, X2 from the investment? (ii) What is the IRR of the investment? (iii) What is the total wealth, W1 of the firm once the investment is announced? O X2 = $5.6m; IRR = 56.8%; W1 = 12 O X2 = $7.84m; IRR = 56.8%; W1 = 12 O X2 = $9.9m; IRR = 56.8%; W1 = 7 O X2 = $7.84m; IRR = 15.68%; W1 = 12 O X2 = $9.2m; IRR = 53.33%; W1 = 7

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