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  1. business
  2. accounting
  3. consider a project with free cash flow in one year

Consider a project with free cash flow in one year of $147,804 or $184,120, with...

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Question

Accounting

Consider a project with free cash flow in one year of

$147,804

or

$184,120,

with either outcome being equally likely. The initial investment required for the project is

$60,000,

and the project's cost of capital is

16%.

The risk-free interest rate is

9%.

(Assume no taxes or distress costs.)

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

waythat

is, what is the initial market value of the unlevered equity?

c. Suppose the initial

$60,000

is instead raised by borrowing at the risk-free interest rate. What are the cash flows of the levered equity, and what is its initial value according to M&M?

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