Garrett Camp and Travis Kalanick are the founders of Uber. Assume that the company currently has $250,000 in equity and is considering an expansion to meet increased demand. The $100,000 expansion would yield $16,000 in additional income before interest expense. Assume that the company currently earns $40,000 annual income before interest expense of $10,000, yielding a return of equity of 12% ($30,000/$250,000). To fund the expansion, the company is considering issuing a 10-year, $100,000 note with annual interest payments (the principal due at the end of 10 years).

Required:

1. Using return of equity as the decision criterion, show computations to support or reject the expansion if interest on the note is (a) 10%, (b) 15%, (c) 16%, (d) 17%, (e) 20%?

2. What general rule do the results in part 1 illustrate?