Part 2:

Assuming you will obtain a bank loan of 75% of the initial cost at an interest rate of 5.50% per year. The loan requires interest payment only at end of each year and the loan principle is due at end of the 10th year (like a bond arrangement). Everything else stays the same as Part 1 except interest expenses are tax deductible. Re-calculate everything as you did in Part 1. Based on the result of Part 2 and an Incremental IRR analysis, make your recommendation as which way to go, Part 1 or Part 2, and explain how does financial leverage affect your decision in relation to the selection of this project?

Part 1:

dgArea(S Base at end af each year 6,815,385 Operating Expense bepreciation Charge Tax @30% tax rate $ 660,000 693000 727,650 764,033 802,234 842,346 884463 $923,686 975,121 210,000 216300 222,789 229,473 236,357 24344 250,751 258,274 $ 266,022 633,712 670,413 09,099 28 205 128,205 128,205 3,659 284,448 2,653 306,371 434,576 S457,690 S 482,060 $ 507,750 353,462 534,831 57,690 482,06O 507,750 $ 023,877 34,831 378