Rotterdam Corp. (RC) is considering a new two-year project. RC estimates that there is a 25% probability that cash flows in two years will be €250,000, a 30% probability that the cash flows will only be €200,000 and a 45% probability the cash flows will be €350,000. The cost of the project is €220,000. The project’s cost of capital is 15% and the risk-free rate is 5%. What is the NPV of the project if financed with 100% equity? If the €220,000 cost of the project is financed with all equity, then what is the rate of return on the unlevered equity? If the project is financed with 30% debt (at the risk-free rate), what is the expected return on the levered equity?

Rotterdam Corp. (RC) is considering a new two-year project. RC estimates that there is a 25% probability that cash flows in two years will be €250,000, a 30% probability that the cash flows will only be €200,000 and a 45% probability the cash flows will be €350,000. The cost of the project is €220,000. The project’s cost of capital is 15% and the risk-free rate is 5%. What is the NPV of the project if financed with 100% equity? If the €220,000 cost of the project is financed with all equity, then what is the rate of return on the unlevered equity? If the project is financed with 30% debt (at the risk-free rate), what is the expected return on the levered equity?

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter11: Capital Budgeting And Risk

Section: Chapter Questions

Problem 9P

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