Answer:
Yes;a.because the money will be recovered in 2.10 years
Explanation:
Assume the company takes uses the loan to expand, how much time will it take to pay back the loan?
This can be expressed as;
T=F+S+T
where;
T=total cash flow needed to repay the loan
F=cash flow for the first year
S=cash flow for the second year
T=cash flow for needed in the third year to pay the loan
In our case;
T=$215,000
F=$60,000
S=$140,000
T=unknown
replacing;
215,000=60,000+140,000+T
T+200,000=215,000
T=215,000-200,000=15,000
The cash flow needed in the third year to pay the loan=$15,000
Determine how long it will take to raise $15,000 in the third year;
total cash flow in the third year=$150,000
1 year=$150,000
To raise $15,000=15,000/150,000=0.1 years
Total number of years=1+1+0.1=2.1 years
It will take 2.1 years to pay back the loan.
The firm should expand since the money will be recovered in 2.1 years even before the repayment period.
