Consider a project with free cash flows in one year
of $130,197 or $182,897, with each outcome being equally likely. The initial investment required for the project is $94,946, and the project's cost of capital is 17 %. The risk-free interest rate is 11 %
a. What is the NPV of this project?
b. Suppose that to raise the funds for the initial investment, the project is sold to investors as an all-equity firm. The equity holders will receive the cash flows of the project in one year. How much money can be raised in this way—that is, what is the initial market value of the unlevered equity?
c. Suppose the initial $94,946 is instead raised by borrowing at the risk-free interest rate. What are the cash flows of the levered equity, what is its initial value and what is the initial equity according to MM?