Question

Consider a project with free cash flows in one year of $90,000 in a weak economy or $117,000 in a strong economy, with each outcome being equally likely. The initial investment required for the project is $80,000, and the project's cost of capital is 15%. The risk-free interest rate is 5%.Suppose that to raise the funds for the initial investment the firm borrows $80,000 at the risk free rate, then the cost of capital for the firm's levered equity is closest to:A) 45%B) 25%C) 15%D) 95%

Answer 1

As per our research the correct question is

Consider a project with free cash flows in one year of $90,000 in a weak economy or $117,000 in a strongeconomy, with each outcome being equally likely. The initial investment required for the project is $80,000, and the project's cost of capital is 15%. The risk-free interest rate is 5%.6) The NPV for this project is closest to:

A) $6,250 B) $14,100 C) $10,000 D) $18,600

Answer:

The correct answer is C 10,000 dollars.

Step-by-step explanation:

This question requires us to calculate the NPV of project. The data is given in question. We can calculate the NPV of project by using discount rate of 15%. and expected cashflows can be calculated as follow.

Outflow = (80,000)-A

Inflow =( 90,000*50% + 117,000*50%) * DF"

= 0.869*103,500 = 90,000 dollars aprox-B

NPV = 10,000 dollars (A-B)

DF = 1/1.15