Question A. XXX Corp is considering investing in a new business. The projected cash inflows are $1000 per year net (after operating costs) and will run for 5 years. The capital setup cost of the business equipment is $3000 and will be financed partly by debt. The interest rate of the debt will be 15% per year provided that the loan is no more than $1500. The loan will be repaid in equal annual payments over 5 years. The interest component of the loan is tax deductible at year end and tax returns are processed at year end each year. Loan repayments and other cash flows are treated in arrears (i.e. at years end). The company tax rate is 30%. Remember that you can find the interest component for the period by subtracting the periods reduction in the capital payout figure of the loan from the amount actually paid to the bank for the period. The businesss equipment is depreciated for tax purposes at the rate of 20% of cost per year. Depreciation is tax deductible. The equipment will be sold for market value at termination, which is expected to be zero.

1. Find the IRR of the investment on an after-tax basis if the money borrowed is $1500.

2. Plot the after-tax IRR as a function of the amount borrowed from zero up to $1500.

3. Re-do 2. With lower tax rates 15% and 25% and comment on the effect of tax on the IRR.

4. Explain how the managers will interpret this financial analysis when making a decision about whether to go ahead and how much to borrow. (i.e., interpret what it tells us). (Max 10 lines) Please answer all 4 parts