Freddy Corporation is deciding whether to invest in a new project. The project would have to be financed by equity, the cost is $2,000,000. The discount rate for stock is 18 percent and the cost of borrowing is 14 percent and the tax rate is zero. The predicted cash flows excluding this new project are $4,500,000 in a good economy, $3,000,000 in an average economy, and $1,000,000 in a poor economy. Each economic outcome is equally likely to occur and the promised debt repayment is $3,000,000.

What is the value of the firm and its debt and equity components before and after the project addition?

Should the company take the project? Show/explain.

Suppose this was an all equity company (no debt repayment). Should the company take the project? Show/explain.