Question
A biofuel subsidiary of Petrofac, Inc. is planning to borrow $12 million to acquire and expand the product line of a small technology-based company. Due
A biofuel subsidiary of Petrofac, Inc. is planning to borrow $12 million to acquire and expand the product line of a small technology-based company. Due to the risk involved, the rate on a 5-year loan is highly variable; it could be as low as 7%, as high as 15%, but is expected to be 10% per year. Due to revenue projections, the company will move forward only if the AW of total costs is below $5.7 million per year. The M\&O costs are estimated at $3.1 million per year. The anticipated sales price of the company in 5 years could be $2.1 million if the interest rate is 7% or as much as $2.5 million if the rate is 15%, but will most likely be about $2.3 million at the 10% per year rate. Is the decision to move forward sensitive to the loan interest rate and sales price estimates?
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