Benefits of borrowing. Wilson Motors is looking to expand its operations by addi

Question

Benefits of borrowing. Wilson Motors is looking to expand its operations by adding a second manufacturing location. If it is successful, the company will make $430,000. If it fails, the company will lose $270,000. Wilson Motors is trying to decide whether it should borrow the $270,000 given the current bank loan rate of 18%. Should Wilson Motors borrow the money if a.the probability of success is 88%? b.the probability of success is 81%? c.the probability of success is 72%? Benefits of borrowing. Wilson Motors is looking to expand its operations by adding a second manufacturing location. If it is successful, the company will make $430,000. If it fails, the company will lose $270,000. Wilson Motors is trying to decide whether it should borrow the $270,000 given the current bank loan rate of 18%. Should Wilson Motors borrow the money if a.the probability of success is 88%? b.the probability of success is 81%? c.the probability of success is 72%? Benefits of borrowing. Wilson Motors is looking to expand its operations by adding a second manufacturing location. If it is successful, the company will make $430,000. If it fails, the company will lose $270,000. Wilson Motors is trying to decide whether it should borrow the $270,000 given the current bank loan rate of 18%. Should Wilson Motors borrow the money if a.the probability of success is 88%? b.the probability of success is 81%? c.the probability of success is 72%?

Explanation / Answer

Wilson Motors borrow the money if the expected payout exceeds cost of loan

a. the probability of success is 88%?

Expected payout = .88($430,000) + .12(-$270,000) = $346,000

Cost of borrowing = $270,000 (1+.18) = 318,600

Expected Profit = 27,400 Borrow

b. the probability of success is 81%?

Expected payout = .81($430,000) + .19(-$270,000) = $297,000

Cost of borrowing = $270,000 (1+.18) = 318,600

Expected loss = -21600   Do not Borrow

c. the probability of success is 72%?

Expected payout = .72($430,000) + .28(-$270,000) = $234,000

Cost of borrowing = $270,000 (1+.18) = 318,600

Expected loss = -84600 Do not Borrow

Related Questions

Navigate

• Browse (All)
• Browse B
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.