Topsider Inc. is considering the purchase of a new leather-cutting machine to replace an existing machine that has a book value of $3000 and can be sold for $1500. The old machine is being depreciated on a straight-line basis, and its estimated salvage value 3 years from now is zero. The new machine will reduce costs (before taxes) by $7000 per year. The new machine has 30 year life, it costs $14,000, and it can be sold for an expected $2,000 at the end of third year. The new machine would be depreciated over its 3 year life using the MACRS method.

Assuming a 40% tax rate and a required rate of return of 20 percent if the project is all equity financed. You are an associate in the corporate finance office, after carefully reviewing and analyzing the data, answer the following questions with quantitative evidence and explain your reasoning in an understandable manner to executives (many are not finance expert!) at the next board meeting.

If your firm's cost of capital for similar risky project is 16%, would you recommend undertaking the project, and why?

A) Would you recommend the company to undertake the project if it is all equity financed? and why?

B) Would your recommendation change if Topsider is able to borrow some short term debt financing in the amount of $12,500 at the rate of 8% for 2 years.

C) Would you recommend taking the short term loan as offered in part C) above? And why?