Don Phelps Recently Started a Dry Cleaning Business

question 10

Essay

Don Phelps recently started a dry cleaning business. He would like to expand the business and have a coin-operated laundry also. The expansion of the building and the washing and drying machines will cost $100,000. The bank will lend the business $100,000 at 12 percent interest rate. Don could get a 10 percent interest rate loan if he uses his personal house as collateral. The lower interest rate reflects the increased security of the loan to the bank, because the bank could take Don's home if he doesn't pay back the loan. Don currently can put money in the bank and receive 6 percent interest.
Required:
Provide arguments for using 12 percent, 10 percent, and 6 percent as the opportunity cost of capital for evaluating the investment.

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Definitions:

Anxiety Disorders

A cluster of psychological disorders marked by intense anxiety and fear, disrupting daily tasks.

Phobias

Irrational and excessive fears of specific objects, situations, or activities.

Amnesia

A condition characterized by memory loss, which can be partial or complete, temporary or permanent.

Compulsion

A psychological condition or mechanism where an individual feels the urgent need to perform certain behaviors or rituals repeatedly.