Halifax Technologies primarily relies on 100% equity financing to fund projects. A good opportunity is available that will require $250,000 in capital. The Halifax owner can supply the money from personal investments that currently earn an average of 8.5% per year. The annual net cash flow from the project is estimated at $30,000 for the next 15 years. Alternatively, 60% of the required amount can be borrowed for 15 years at 9% per year. Using a before- tax analysis and setting the MARR equal to the WACC, determine which plan, if either, is better.
Halifax Technologies primarily relies on 100% equity financing to fund projects. A good opportunity is available that will require $250,000 in capital. The Halifax owner can supply the money from personal investments that currently earn an average of 8.5% per year. The annual net cash flow from the project is estimated at $30,000 for the next 15 years. Alternatively, 60% of the required amount can be borrowed for 15 years at 9% per year. Using a before- tax analysis and setting the MARR equal to the WACC, determine which plan, if either, is better.
Chapter5: The Time Value Of Money
Section: Chapter Questions
Problem 22P
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Question
Halifax Technologies primarily relies on 100% equity
financing to fund projects. A good opportunity
is available that will require $250,000 in capital.
The Halifax owner can supply the money from personal
investments that currently earn an average of
8.5% per year. The annual net cash flow from the
project is estimated at $30,000 for the next 15 years.
Alternatively, 60% of the required amount can be
borrowed for 15 years at 9% per year. Using a before-
tax analysis and setting the MARR equal to the
WACC, determine which plan, if either, is better.
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