Riverhawk company is considering an investment project that generates a cash flo

Question

Riverhawk company is considering an investment project that generates a cash flow of $2000 next year if the economy is favorable but generates only $800 if the economy is unfavorable. The profitability of favorable economy taking place is 60% and unfavorable economy is 40% The project will last only one year and be closed after that. The cost of investment is $1,300 and Riverhawk plans to finance the project with $300 of equity and $1000 of debt. Assuming the discount rates of both equity and debt are 0% What is the expected cast flow to riverhawk's shareholders if the company invests in the project?

A. $0 B. $600 C. $800 D $920 E $1,420

Explanation / Answer

Expected payoff = 2000*0.6+800*0.4 = 1520

Debt = $1000

Equity = $300

since discounting rate is 0

profit = expected payoff- incvestment= 1520-1000 = 520

returns to shareholders = 520-300 = 220

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