A small business needs to invest in a new piece of equipment. The equipment costs $50,000 and has a useful life of 5 years. The business plans to depreciate the equipment using the straight-line method. The business has $10,000 in cash on hand and can borrow $40,000 at a 7% interest rate to purchase the equipment. The business expects the equipment to generate annual revenue of $25,000 and annual operating expenses of $8,000 over the next 5 years. Should the business borrow money to purchase the equipment or use its existing cash? Show all calculations and explain your answer.

(20 marks)

Answer rating: 100% (QA)

The detailed answer for the above question is provided below To answer this question we need to compare the present value of the cash flows associated with the two financing options borrowing the mone... View the full answer