A new software start-up, Lutoj, Inc., is developing a new smart home software product. Lutoj believes revenue must reach $5 million in Year 3 for the product to be viable. Lutoj's operating margin (EBIT/Sales) is 20%, the tax rate is 30%, and asset turnover is 5X. The founders have $200,000 between them for initial equity funding. Assume Lutoj will pay no dividend.

a. With no other financing, will the $200,000 of founder investment be sufficient to achieve the Year 3 sales target? If not, what level of initial equity investment would be required?

b. Assume Lutoj cannot raise additional equity, but will use debt to achieve the scale necessary to reach the Year 3 sales target. They can borrow at an 8% interest rate before tax. How much debt will initially be required?