Question
Southwest Ventures is considering an investment project that generates a cash flow of $14,000 next year if the economy is favorable but generates only $6,500
Southwest Ventures is considering an investment project that generates a cash flow of $14,000 next year if the economy is favorable but generates only $6,500 if the economy is unfavorable. The probability of favorable economy is 70% and of unfavorable economy is 30%. The project will last only one year and be closed after that. The cost of investment is $10,000 and Southwest Ventures plans to finance the project with $2,000 of equity and $8,000 of debt. Assuming the discount rates of both equity and debt are 0%. What is the expected cash flow to Southwest Ventures' shareholders if the company invests in the project?
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