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Larry and Janice intend to invest $250,000 in the business. Their financial projections show that during the first year of operations their business could generate
Larry and Janice intend to invest $250,000 in the business. Their financial projections show that during the first year of operations their business could generate $40,000 in profits (subsequent years could grow well beyond this level). The couple can borrow $125,000 from the bank (6%), and they can use $125,000 of their savings (consider this equity), a 7% return. Q1: Given a 40% tax rate, what is CompuTechs projected return on investment in year 1? What is their weighted cost of capital? Use the template from our in-class activity. [2] Q2: Should the couple launch their business based on your answer to Q1? Why or why not? Answer using less than 20 words, and use abbreviated terms ROI and WACC. [2]
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