8.38 A biofuel subsidiary of Petrofac, Inc. is planning to borrow $12 million to acquire and expand the product line of a small technology-based com- pany. Due to the risk involved, the rate on a 5-year loan is highly variable; it could be as low as 7%, as high as 15%, but is expected to be 10% per year. Due to revenue projections, the company will move forward only if the AW of total costs is be- low $5.7 million per year. The M&O costs are es- timated at $3.1 million per year. The anticipated sales price of the company in 5 years could be $2.1 million if the interest rate is 7% or as much as $2.5 million if the rate is 15%, but will most likely be about $2.3 million at the 10% per year rate. Is the decision to move forward sensitive to the loan interest rate and sales price estimates?

8.38 A biofuel subsidiary of Petrofac, Inc. is planning to borrow $12 million to acquire and expand the product line of a small technology-based com- pany. Due to the risk involved, the rate on a 5-year loan is highly variable; it could be as low as 7%, as high as 15%, but is expected to be 10% per year. Due to revenue projections, the company will move forward only if the AW of total costs is be- low $5.7 million per year. The M&O costs are es- timated at $3.1 million per year. The anticipated sales price of the company in 5 years could be $2.1 million if the interest rate is 7% or as much as $2.5 million if the rate is 15%, but will most likely be about $2.3 million at the 10% per year rate. Is the decision to move forward sensitive to the loan interest rate and sales price estimates?

Intermediate Financial Management (MindTap Course List)

13th Edition

ISBN:9781337395083

Author:Eugene F. Brigham, Phillip R. Daves

Publisher:Eugene F. Brigham, Phillip R. Daves

Chapter12: Capital Budgeting: Decision Criteria

Section: Chapter Questions

Problem 16P: Shao Airlines is considering the purchase of two alternative planes. Plane A has an expected life of...

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