What is the Cost of Debt?

Indeed, Harriet’s ideology involving the use of the cost of debt is probably a bad idea, given the high chances of losing investors’ confidence considering excessive borrowing to finance the new fabrication machines. I would add that the selection of debt financing bears substantial risks with the highly probable behavior of investors hurting the business’s future cash flow. Indeed, the case may worsen if the new machines fail to produce the desired income or materialize sufficient profits. Debt financing is a preferable option whereby a company is highly likely to perform well with consistent cash flows, which place incurred costs at low levels (Majaski, 2020). The student rightfully emphasizes performance as the intrinsic measure for selection of debt financing with Harriet, probably relying on the positive outlook for the business despite the uncertainty posited. Indeed, it is ideal in most situations that capital projects have different capital cost rates, which would assist in budgeting with efficient and adequate projections dictating current needs and ventures. Harriet’s case entailing fabrication machines therein require their annual capital cost rates for proper budget planning whereby success is not based on a long-term tenure success. I would add that the situation not only communicates the high risk for the mentioned project but magnifies the need for an in-depth analysis of a project before a startup can select the mode of financing. Indeed, Harriet posited a startup making it a high-risk venture fortified by a lack of a guaranteed rate of return or success rate, making it necessary to have a more current model to analyze the budget for the project. The student rightfully posits that transparency and realism regarding costs and expectations handle the risk factor. Indeed, success assumptions of a new venture may place a business in a tight spot given failure to meet expectations. However, I would add that for any new project, assumptions are a must, although they should remain realistic and less to avoid any hitch during an engagement. 

Reference  

Majaski, C. (2020). “Debt Financing vs. Equity Financing: What's the Difference?” Investopedia . Retrieved from  https://www.investopedia.com/ask/answers/05/debtcheaperthanequity.asp