Nexus Company is considering an investment project that generates a cash flow of $1,800 next year...

Nexus Company is considering an investment project that generates a cash flow of $1,800 next year if the economy is favorable but generates only $700 if the economy is unfavorable. The probability of favorable economy taking place is 50% and unfavorable economy is 50%. The project will last only one year and be closed after that. The cost of investment is $1,200 and Nexus plans to finance the project with $400 of equity and $800 of debt. Assuming the discount rates of both equity and debt are 0%. What is the expected cash flow to Nexusâ s creditors if the company invests in the project? $0 $950 $500 $750 $800

Expert Solution

Ans) $800

Let us find expected cash flow after one year

Expected cash flow = 1800 x 50% + 700 x 50%

= 900 $ + 350$

= 1250 $

Thus expected cash flow is more than initial investment, means after one year debt of $ 800 will be paid in full

Thus cash flow to creditors = $800

jeff jeffy answered 2 years ago

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