Calculate the expected gross return

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An entrepreneur needs funds for a project. She has funds of her own, but not enough to cover the required investment of $200. If the entrepreneur doesn't misbehave, the project will succeed with probability 1/2, yielding a gross return of $5000 in one year. With probability 1/2, it fails and yields nothing. If the entrepreneur misbehaves, on the other hand, she obtains a private benefit of $30, while lowering the probability of success to 1/3. Lenders require an expected gross return of $1.05 in one year on $1 loaned today-that is, they will lend the present value of the expected return in one year, using an interest rate of .05 to get the present value. What is the maximum amount she will be able to borrow? Explain in detail. What then is the amount of funds of her own she must put into the project if she is to get financing?

Reference no: EM133124680

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