You Are Considering Purchasing Industrial Equipment to Expand One of Your

question 1

Essay

You are considering purchasing industrial equipment to expand one of your production lines. The equipment
costs $100,000 and has an estimated service life of 6 years. Assuming that the equipment will be financed
entirely from your business-retained earnings (equity funds), a fellow engineer has calculated the expected
after tax cash flows, including the salvage value, at the end of its project life are as follows: Now you are pondering the possibility of financing the entire amount by borrowing from a local bank at 12%
interest. You can make an arrangement to pay only the interest each year over the project period by deferring
the principal payment until the end of 6 years. Your firm's interest rate is also 12%. The expected marginal
income tax rate over the project period is known to be 40%. What is the amount of economic gain (or loss) in
present worth by using debt financing over equity financing?

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Definitions:

Health

According to the World Health Organization, is “the ability of an individual to achieve his [or her] potential and to respond positively to the challenges of the environment.”

Human Environmental Factors

Elements within the environment that are influenced or created by humans, affecting human behavior and activities.

Life-Style Factors

Elements related to the way a person or group lives, including habits, attitudes, and behaviors, that can influence health and social outcomes.

Public Health

The science and practice of protecting and improving the health of communities through education, policy making, and research for disease and injury prevention.