a. NPV of the project
Expected cash flow of project in one year = 1/2*132459 + 1/2*193776 = 163117
Present Value = (Cash Flow / (1+r)^t) - Initial Investment
where,
Cash Flow = 163117
r = required rate of return = 22%
t = Number of time periods = 1
Initial Investment = 60000
So, Present Value = (163117 / (1+ 22%)^1) - 60000 = 73702
Thus, NPV of this project is $ 73702.
b. Initial market value of the levered equity
= 163117 / 1.22 = 133702
c. Cash Flows
Date 0 | Cost | Date 1 | ||
Initial Value | Cash flow strong economy | Cash flow weak economy | ||
Debt | $60000 | $1800 | $131976 | $70659 |
Leveraged Equity | $73702 | $16214 | $103860 | $42543 |
Initial market value of levered equity according to MM is $ 73702.
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