Question

Suppose that we are going to make an investment in machinery whose cost is 90,000 euros and we plan to obtain a 20% return, that is, that we will obtain a profit of 18,000 euros. Two scenarios are proposed for financing this project (in both cases we understand that all the benefit obtained is liquidity):

a. Own financing 70% - Other financing 30%. Total cost of external financing: 1,755 euros. Income Tax 25%.

b. Own financing 20% ​​- Other financing 80%. Total cost of external financing: 3,960 euros. Income Tax 25%.

Based on the information provided and considering this operation in isolation, analyse which of these two financing options for the project is more interesting from the point of view of the partners' profitability and the debt ratio. After choosing one of the options, explain what specific types of financing you would use.

Answer 1