Consider a project with an initial investment of 2 million and annual savings start at $900,000 dollars on year one with yearly increments of 5%. The life of the project is 7 years. The maintenance cost start at 200,000 dollars per year and increase by 40,000 every year. The salvage value of the project after 7 years is $200,000 dollars. The tax rate is 35% and the MARR is 15%.
There is the alternative to use a loan to finance the operation. In that case, the investment will be financed with a loan of 30% of the total initial investment, to be paid in 5 years with an interest rate of 10% fixed over the 5 years of payments.
Which of these two alternatives is the best (loan or no loan)? Why?