B E F G H Capital Budgeting Fun Time Entertainment (FTE) has three investment options: an arcade, an escape room, and a bowling alley. Projected cash flows are listed below. Assume all annual cash flows occur at the end of each respective years. Arcade Bowling Alley Escape Room 6 0 Initial Investment (1,000,000) (2,000,000) (500,000) 1 Year 1 100,000 50,000 110,000 8 2 Year 2 200,000 150,000 110,000 9 3 Year 3 300,000 250,000 110,000 10 4 Year 4 400,000 500,000 110,000 11 5 Year 5 500,000 500,000 110,000 12 Sales price (end Yr 5) 1,000,000 . 1,000,000 110,000 13 14 As a start up, FTE must finance any capital project via a bank loan. 15 Wells Fargo provides FTE with two options to borrow any amount up to $5 million: 16 17 Option A: a 10% loan with no closing fees 18 Option B: an 8% loan with a $100,000 closing fee 19 20 If properly evaluated, how much better off now (i.e. on a present value basis) is FTE if it goes for the 8% loan rather than the 10% loan? 21 22 23 24 25 26