CF with Dep and Loan Interest for BlackBoard rixsx-Excel Noah Benedict After Tax
ID: 2794228 • Letter: C
Question
CF with Dep and Loan Interest for BlackBoard rixsx-Excel Noah Benedict After Tax Anaysis with Depreciation and Loan Interest You own a small business with very good cash flow and future growth prospects. A cash infusion is needed to purchase equipment and to achieve this future growth. You have $600,000 in equity capital but need a total of $1,000,000. You present a propo sal to an investor group to borrow the remaining $400,000 needed They offer to loan you the $400,000 at a rate of 10% per year with uniform annual payments for 5 years. If the equipment is purchased operating (not indluding the loan) net cash flow before taxes will be shown below. The equipment will be depreciated as MACRS 5 year property. The tax rate is 35%. Calc ualte the after tax cash flow. The nexd work sheet is a blank for you to solve the problem for all 7 years The third work sheet shows the problem partially solved through year 3 for you to complete years 4-7 The fourth work sheet has the full solution for you to check your work recommend that you do work sheet 2 or 3 and then check your answers with work sheet 4. End of Cash Year Flow 0 51,000,00 5400,000 550000 5600,000Explanation / Answer
Working note 1:- Calculation of depreciation as per MACRS-5 year property
Net Salvage Value is assumed to be 0
Cost of the machine = $ 1,000, 000
Working Note 2:-
Calculation of Equalised annual repayments(A) of loan for 5 years:-
A= P × [ r*(1+r)n ÷ (1+r)n - 1]
P = $ 400,000
r = 10%
n = 5
A= 400,000 × [ 0.10*(1.1)5 ÷ (1.1)5 -1]
= 400,000 × [0.161051 ÷ 0.61051]
= 105, 519
Repayment schedule
Calculation of After Tax Net Cash flows
Years Rate of depreciation Amount of Depreciation 1 20% 200,000 2 32% 320,000 3 19.20% 192,000 4 11.52% 115,200 5 11.52% 115,200 6 5.76% 57,600