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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?

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