Doubts

Review Quiz 8b, Ex. 9

Re: Review Quiz 8b, Ex. 9

by Julio Crego -
Number of replies: 0
I agree it confusing.

If the firm uses its own money, the value of the assets increases by the NPV. In this case, 15 + 4 = 19.

Another way of seeing it is that the firm has a negative cashflow of -2 and then future cashflows with present value 6; hence, the value is 15-2+6=19

Debt increases because the firm would not have enough assets to pay the debt if the project is not implemented. Equityholders only get a benefit when the firm can pay the debt in at least one scenario.