You consider starting a project where revenues are risky. You

have no direct evidence of how risky they are, but make the

assessment that they are equally risky to the assets of a

company that has traded equity. For this company, you have

the following data.

The running cost of the project has zero covariance with the

market index, which has an expected return of $7\%.$ The

risk$-$free rate is $4\%,$ and the rate of inflation is $2\%.$ Both

revenues and costs are expected to grow at the rate of

inflation. Next year's revenues are likely to be $10$ and next

year's costs are likely to be $5.$ What is the value of the project?