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Your friend has started a new business that owns a building. She would like some insights on how she should evaluate new opportunities. She has $500,000 in funds to use. Looking at her business, you discover the following opportunities:
Insulate her building at a cost of $120,000. This saves 10,000 gallons of fuel per year. Fuel currently costs $3.00 per gallon. Planning horizon is eight years.
Pay off a $380,000 capital equipment loan that has an interest rate of 7% and a maturity of 8 years.
Lend another entrepreneur $120,000. This person, who she met at a local entrepreneur center event, promises to double her $120,000 in 8 years.
Repay her car loan for her recently acquired Jaguar. She borrowed $120, 000 for 5 years at 3.9% interest to buy this car. She can sell this car today for $97,000 (losing approximately $23,000 but saving on interest expenses).
So, your friend would like some pre-tax advice (that means do not consider taxes or depreciation) on what and how to decide. You can also ignore inflation in your calculations. Again, she has $500,000 to use in this set of decisions. Make a recommendation that is supported by your calculations.
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