You are considering a risk-free investment that costs
$7,000
and pays
$8,500
in one year.
You can either pay all cash for the investment or you can borrow half and pay cash for the other half. If you
borrow
$3,500
, you will be required to pay back
$3,710
in one year.
The risk-free rate is
6%
.
What is the project's NPV? Is the NPV affected if you borrow some of the funds?