Which would generate revenue of 100 million

Reference no: EM133630395

Question: A firm must choose between two projects for its new factory. (1) The first alternative is to build it in the US, which would generate revenue of 100 million or 35 million USD one year later, depending on whether the global economy is in expansion or recession, respectively. (2) The second alternative is to build it in Mexico, which would generate revenue of 85 million or 26 million USD, depending on whether the global economy is in expansion or recession, respectively. Moreover, in one-year time the firm must pay 55 million USD (if it chooses the first project) or 35 million USD (if it chooses the second project) to debtholders. Finally, the annually compounded risk-free rate is 5% per annum and the state price of the up-state (i.e., expansion) is 0.53.

Reference no: EM133630395

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