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Please let me know the answer of this question World Cellfone Co. is considering the purchase of a new telecommunications system for $60 million. This
Please let me know the answer of this question
World Cellfone Co. is considering the purchase of a new telecommunications system for $60 million. This system will boost the firm's productivity so that its operating earnings will increase by $12 million per year over the next 8 years. World Cellfone Co. corporate tax rate is 35% and its debt and equity costs are 7% and 14%, respectively. The manufacturer of the telecommunications system is willing to loan the firm $25 million for the purchase at a subsidized rate of 5% (with World Cellfone Co. putting up the remainder from its retained earnings account). The loan principal is to be paid off in 5 equal installments over 5 years with interest being paid every year on the loan outstanding. If the firm's required rate of return under all-equity financing is 10%, should it go ahead with the purchase?
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