Your small business has $200K in capital, in a CD that is currently earning 3% annually. You can secure a loan of up to $400K, at an interest rate of 8% annually. The corporate income tax rate is 21%, with a capital gains tax rate of 15%. Suppose you have the opportunity to invest in a revenue-generating project with a MACRS class life of 5 years. The initial investment is $350K. There is an estimated 150K salvage value, disposing of the asset in year 6. Receipts are expected to be $60K per year, with $1750 in maintenance costs per year.

1. Is the investment worthwhile, using the CD and an additional $150K in borrowed money?
2. Is it wise to use all your cash for this investment? Why or why not?
3. To save cash, up to how much can you borrow to finance this project and still break even?

Hints: Adapt the ATCF method to include servicing the loan (the interest payment is tax deductible; while the principal payment reduces ATCF) or use the textbook method (see page 507). You will need to compute the WACC (= MARR for this problem).