Harbour Shipping Ltd. (HSL) is considering investing in a separate tug boat enterprise that would be held and managed for five years and then sold. The total cost at the end of 2009 would be $30 million. HSL would acquire 20% of the tugboat company for $5 million. Venture Capitalists Inc. (VCI) has been asked to invest $20 million to obtain the remaining 80% ownership of the tugboat business. VCI's cost of capital is 12%. The remaining purchase price would be obtained in the form of a long-term bank loan at 15% interest. The estimated annual operating profit, shown below, would be used each year to pay the interest on the bank loan and as much principal as possible. The remaining bank loan principal would be repaid at the end of five years when the tugboat company is re-sold. Additional working capital of $450,000 will be required at the end of 2012. New equipment, costing $2 million and having an economic life of 10 years with a salvage value of $100,000, is required at the end of 2011. HSL uses the straight-line depreciation method. At the end of five years, the tugboat company would be sold for $40 million.

Required:
(a) Calculate the loan outstanding at the end of 2014.
(b) Calculate the approximate internal rate of return for VCI on this tugboat investment.
(c) Should VCI invest in the tugboat operation?

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2010 2011 2012 2013 2014 Operating profit $1,000,0001,400,000 1,467,000 $1,678,000 $2.420,000