The All-Mine Corporation is considering whether to invest in two mutually exclusive projects. Both projects cost $100,000. Project A will generate expected cash flow $250,000 in good economy, and $2,500 in bad economy. Project B will generate expected cash flow $300,000 in good economy, but loss $300,000 in bad economy. Each economic outcome is equally likely.

a) If All-Mine is an all-equity firm, which project should the company choose? What is the incremental value with Project A or B respectively? (2 points)

b) If All-Mine can borrow debt of $50,000 to support its investment, which project should the company choose? What is the incremental value with Project A or B for shareholders respectively? (2 points)

c) Discuss why the presence of debt affects firms investment choice. (1 point)