CF with Dep and Loan Interest for BlackBoard rixsx-Excel Noah Benedict After Tax

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 5600,000

Explanation / 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

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