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Homework answers / question archive / Consider a project with free cash flows in one year of ?$132,732 or ?$178,988?, with each outcome being equally likely

Consider a project with free cash flows in one year of ?$132,732 or ?$178,988?, with each outcome being equally likely. The initial investment required for the project is ?$98,537?, and the? project's cost of capital is 15%. The? risk-free interest rate is 12%.

**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 ?$98,537 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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