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Smith Machining Corp. is a small business considering investing in one of 2 new product production lines. However, they can only afford to do one

Smith Machining Corp. is a small business considering investing in one of 2 new product production lines. However, they can only afford to do one of the projects. The development and implementation of either project will take a year and the initial cash outlay will be $1,500,000 if they take a traditional bank loan at 10%. If they pursue a Small Business Association (SBA) guaranteed loan through their bank, the rate on the loan will be 7% however, they will need to pay an up-front fee of 10% of the net proceeds of their loan, which can be added to the loan. The projects have the following projected net cash flows:

Year

Project A

Project B

1

$ 250,000

$ 100,000

2

$ 250,000

$ 100,000

3

$ 250,000

$ 100,000

4

$ 500,000

$ 100,000

5

$ 500,000

$ 100,000

6

$ 250,000

$ 400,000

7

$ 100,000

$ 750,000

8

$ 50,000

$ 750,000

9

$ 50,000

$ 1,000,000

  1. Calculate and show the NPV of each project at the 10% rate
  2. Calculate and show the NPV of each project at the 7% SBA loan rate
  3. Which project would you choose, A or B and why?
  4. Does the SBA loan improve the result and would you recommend getting the SBA loan even with the added 10% cost? Why or why not?

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