CES Inc Is Considering Obtaining a Bank Loan to Finance a a New

Essay

CES Inc. is considering obtaining a bank loan to finance a new operation. The company is required by the bank to submit GAAP-compliant accounting records (which they currently do not keep). CES has contracted with your consulting firm to estimate the costs and benefits of this new operation.
Management provides you with the following information regarding their financial position:
Expected performance next month (before considering the potential investment):
The loan contract has the following information:
Bank loan: $500,000
Interest rate: 1% per month, payable at the end of the month. Interest rate increases to 1.5% per month if the company suffers a net Operating Loss before Interest and Taxes that month (by GAAP standards).
After evaluating the company, you report the following estimates:
Monthly cost of keeping a second set of accounting records: $5,000
Potential return on investment: 2% per month (through increased sales, after considering the costs involved).
Would you recommend that CES take out the loan (i.e. would it be profitable for them)?