Loyola Turbo Engines is looking at expanding its operations by adding another manufacturing location. If successful, the

Question:

Loyola Turbo Engines is looking at expanding its operations by adding another manufacturing location. If successful, the company will make $750,000, but if it fails, the company will lose $300,000. Loyola can borrow the required capital of 300,000 at 16%.

(a) If all their projections point to an 85% probability of success, should they borrow the money and go ahead with the expansion?

(b) Above what minimum probability of success will the project be acceptable with a discount rate of 16%?

Discount Rate
Depending upon the context, the discount rate has two different definitions and usages. First, the discount rate refers to the interest rate charged to the commercial banks and other financial institutions for the loans they take from the Federal...