Larry and Janice intend to invest $250,000 in the business. Their financial projections show that during...

Transcribed Image Text:

Larry and Janice intend to invest $250,000 in the business. Their financial projections show that during the first year of operations their business could generate $40,000 in profits (subsequent years could grow well beyond this level). The couple can borrow $125,000 from the bank (6%), and they can use $125,000 of their savings (consider this "equity"), a 7% return. Q1: Given a 40% tax rate, what is Computech's projected return on investment in year 1? What is their weighted cost of capital?! Q2: Should the couple launch their business based on your answer to Q1? Why or why not? Answer using less than 20 words, and use abbreviated terms ROI and WACC. [2] Larry and Janice intend to invest $250,000 in the business. Their financial projections show that during the first year of operations their business could generate $40,000 in profits (subsequent years could grow well beyond this level). The couple can borrow $125,000 from the bank (6%), and they can use $125,000 of their savings (consider this "equity"), a 7% return. Q1: Given a 40% tax rate, what is Computech's projected return on investment in year 1? What is their weighted cost of capital?! Q2: Should the couple launch their business based on your answer to Q1? Why or why not? Answer using less than 20 words, and use abbreviated terms ROI and WACC. [2]

Answer rating: 100% (QA)

Solutions To calculate the projected return on investment ROI in year 1 we need to consider the profits after tax Given a 40 tax rate the profits afte... View the full answer