Suppose a project costs $200,000. The projects prospects will become known by the end of the year. It will either be a success and pay $75,000 for each of the next ten years, or it will be a failure and pay $40,000 for each of the next ten years. The probability of success is 80%. Company Z is in the same business. Company Z has an equity of 3 and a debt of 0.4. Company Zs equity is valued at $2 million and its debt is valued at $6 million. The risk free rate is 4% and the equity premium is 3%.

(a) What is Company Zs cost of capital? (b) What is the projects ?

(c) What is the projects opportunity cost? (d) What is the projects NPV?

(e) What is the projects NPV contingent on success?