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Exotic Rentals has four independent projects under consideration, each with a required rate of return of 14%. The total projects budget is $800,000. A table showing the investments and projected free cash flows follow:
Project/Year
Maserati
Lamborghini
Ferrari
BMW i8 Coupe
0 (investment)
$150,380
$221,320
$286,550
$175,500
1
$40,000
$85,000
$100,000
$52,000
2
$80,000
$110,000
$125,000
$90,000
3
$60,000
4
$92,000
$70,000
5
$95,000
$150,000
$135,000
No additional cash flows are expected from any of the five projects after year 5. The year 5 cash flow includes rentals and auction of the exotic vehicles into the secondary car market.
Question 1: Concluding Exotic Rentals, firm management is considering a loan to supplement the $800,000 set aside for the vehicles. The size of the loan would be approximately $34,000 and the interest rate would be 11.25%. Should Exotic Rentals take out the loan and fund all four projects? Base you decision only on the financial aspects of the deal.
[A] No
[B] Insufficient information to make a decision
[C] Yes
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