Question 1 (18 marks) (a) A firm wants to undertake an investment project which costs N$25,000, which it wants to finance through a bank loan. The project has an 80 percent probability of success. If the project succeeds the firm will make a cash flow of N$75,000 after a year. If it fails the firm will get a cash flow of N$0 and will not be required to pay anything to the bank. The bank has a required rate return of 25%. (a) Calculate the project's expected cash flow. (2 marks) (b) Briefly explain the concept of individual rationality constraint. (2 marks) (c) What will be the bank's loan rate? Will the bank be willing to lend at this rate? Explain. (4 marks) (d) How much will be the bank's safe income? (2 marks) (e) How is the bank's lending rate related to the probability of failure? Explain why it is the case. (2 marks) (f) What will be the firm's expected profit at the rate in (c)? Will the firm be willing to participate in the contract at that rate? (3 marks) (g) How much will be the firm's uncertain incomes? What will be the expected value of these incomes