Question
Consider the following world. There are two time periods, t = 0 (today) when the decisions are made; and t = 1 the (uncertain) future.
Consider the following world. There are two time periods, t = 0 (today) when the decisions are made; and t = 1 the (uncertain) future. In the future, at t = 1, the world can be in one of the two states. The UP state (happens with probability 0.5) or the DOWN state (happens with probability 0.5). Assume that the interest rate is zero (i.e., no need to discount between t = 1 and t = 0).
Now consider a following project that the firm can take. The project payoffs (at time t = 1) are in addition to the payoffs from the existing assets of the firm. In the UP state, the payoff on the project equals -$50.00 (negative $50.00). In the DOWN state, the payoff on the project is $100.00 (positive $100.00).
[4.4. 2 points] What is the PV (at t = 0) of the project described above? Based on the PV of the project, should the company accept (take) the project or not? In this question, your calculations are based only on the values of the project (just the project, without the assets of the firm).
[4.5. 2 points] Suppose the firm takes the project. What is the PV (at t = 0) of the firm with the project accepted? Here you are working with assets of the firm and the project payoffs.
[4.6. 2 points] Suppose the firm takes the project. What is the PV of Debt, PV(Debt) (at t = 0)?
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