Would you advise him to take the loan and invest

Reference no: EM132173469

Question: Mr. X", a friend of yours, is asked to invest in the following project: installation and operation of a facility with a life span of five years. The initial investment is $90M. It will have a net profit of $25M/ the first two years and $30M/Yr in years 3, 4, and 5. At the end of year 5 it has to be disposed of at a cost of $10M with no resale value.

a. If he has the money and his opportunity cost of money is 10% (i=10%), would you advise him to invest or not? Yes? No? Why? Explain.

b. If he can only put down $33M but his bank will extend him a loan for the rest of the initial investment to be used on this project, at 15% in a way that he has to pay it back in equal installments at the end of each of the five years with no collateral, would you advise him to take the loan and invest? Yes? No? Why? Explain.

Reference no: EM132173469

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