A. NPV of the project
NPV = -2000 + 2500/(1.15) = $173.91
B. Value of the firm and its debt and equity components before and after the project addition.
Determine expected cash flows before the project.
($3,000 + $3,000 + $1,000)/3)/1.15 = $2,333.33/1.15 = $2,028.99
($1,500 + $0 + $0)/3)/1.15 = $500/1.15=$434.78
Determine value with project.
($3,000 + $3,000 + $3,000)/3)/1.15 =$3,000/1.15 = $2,608.70
($4,000 + $2,500 + $500)/3)/1.15 = $2,333.33/1.15=$2,028.99
C. The company should not take the project because the NPV does not go to equity but to bond holders.
