Assume that capital markets do not exist. Ryan has $79,000 today (t = 0) and will receive $98,000 in exactly one year (t = 1). Here, if no capital or financial market exists, then Ryan must consume $79,000 now and $98,000 next year. Next consider this case when borrowing and lending at r =7% are available in the financial markets; Ryan now has a real investment opportunity, or business project. If Ryan decides to accept this opportunity, it will cost $20,000 now (t = 0) and will offer a risk-free payoff of $25,000 next year. Now, revisit the point Y where Ryan has $79,000 now and will receive $98,000 next year, but this time the real asset project exists. Assume that he still wants to consume $79,000 now (t = 0), and answer the following.
How much more can Ryan consume next year?
What is the NPV of the project?