Question

Consider a very risky project the firm can undertake with the below payoffs and probabilities. Assume the cost of the investment is $1,000 and the required return is 30%, what is the NPV of the project? What is the payoff to bondholders and shareholders in the case where the project is successful AND in the case where the project is unsuccessful?

The Gamble	Probability	Payoff
Successful Project	10%	$10,000
Unsuccessful Project	90%	-

Assets	Book Value	Market Value	Liabilities and Equity	Book Value	Market Value
Cash	$1,000	$1,000	Long-term Bonds	$1,500	$1,500
Fixed Assets	2,000	500	Equity	1,500	-
Total	$3,000	$1,500	Total	$3,000	$1,500

Answer 1