Riverside Technologies Incorporated $($RTI$)$ is a small firm in North Sioux City, SD$,$ that provides IT solutions for other companies. In addition to providing IT services and computer hardware $($i$.$e$.,$ laptops, desktops, and tablets$),$ RTI has decided to add customized computer bags for companies as well. Companies can have RTI create computer bags and other accessories with a custom logo$.$

Suppose that a firm like RTI wants to add embroidery service for their customers. The firm would need to invest in five high$-$end embroidery machines, which can embroider high$-$quality graphics that can handle repeated use on backpacks, laptop cases, and tablet covers. These machines will cost $$15,000$ each and have an expected life of five years. The firm will also need to hire someone to operate the machines at a salary of $$40,000$ per year plus benefits equal to $25$ percent of salary. The firm provides a cost$-$of$-$living increase to salary $($including benefits$)$ of $3$ percent annually.

Suppose that the firm has enough in cash reserves to finance this expansion into a new product line itself; however, the firm could also take out a loan to finance the expansion. If financing the expansion itself, the firm will be giving up $2$ percent interest on a CD account. If using a loan to finance the expansion, the firm will pay an interest rate equal to $5\mathrm{.}75$ percent; assume this interest rate is paid annually on the full amount needed to finance the machines.

The firm$$s sales department has assured management it will be able to sell laptop bags, backpacks, or tablet cases to a minimum of $2,500$ customers. Each customized item will sell for $$50$ and will cost $$15$ to purchase and customize.

Using the template, calculate operating profit for both the self$-$financing scenario and the debt$-$financing scenario. This analysis should include revenue and costs associated with producing the product, annual salary and benefits of the employee hired to operate the machines, and loan payments where relevant.

Next, find costs that can be deducted from profit to lower the tax bill. Assuming a straight$-$line depreciation, find the annual depreciation allowance for both financing options. For the case where interest is paid, find the amount of interest that can be deducted.

Calculate the taxable profit; taxes paid, assuming a $10$ percent tax rate; and profit after taxes. Remember that the depreciation allowance is only a cost for the purposes of taxes.

Find the present value of profit after taxes for each year using either the CD interest rate or the loan rate as appropriate; add the yearly present values to find the present value of future profits. Subtract from this the cost of the investment; remember you$$ve already included the costs of the loan in your operating profit for the case of debt financing.

How should the firm finance this expansion? Explain your reasoning.