Mitchell Bancorp is considering making a loan at 3% interest (c/a) to SohnCo to
ID: 1194450 • Letter: M
Question
Mitchell Bancorp is considering making a loan at 3% interest (c/a) to SohnCo to buy a machinetool worth $300 million. The tool has no salvage value and is depreciated over 3 years by sum-of-years digits. In this state, SohnCo pays 50% tax. The before-tax cash flow is estimated as$200M, $250M, and $300M over the three years. The CEO of Mitchell Bancorp has noticed thatSohnCo has been losing money in this business sector by investing wildly in projects andcautions the use of an After-Tax MARR of at least 12%. Assume that Mitchell Bancorp makesthis loan. Will SohnCo generate enough ATCF to pay back this loan???? Explain your answer.
Explanation / Answer
yes they can generate sufficient cash flows to meet the payments