Consider the previous exercise and assume that in the failure state the firm 2 has assets which have a salvage value RFI = -1. The rest of the model is unchanged. The entrepreneur starts with cash A. The return in case of success is RSI = 101, the probability of success is pH = 4/5 if the entrepreneur behaves and PL = PH - Ap = 2/5 if he misbehaves. The entrepreneur obtains private benefit B 18/5 per unit of investment if he misbehaves and 0 otherwise. (i) Write down the entrepreneur's optimisation problem. (ii) Determine the return to the borrower (R) and the lender (RF) in the case in which the project fails and the optimal level of investment I*. (iii) Explain why outside debt maximises inside incentives. (iv) Repeat the analysis assuming that the assets' salvage value be R = 2.