A company is considering purchasing a special machine to expand one of its production lines. The machine costs $1,000,000 and has an estimated service life of 3 years annual after-tax revenue are expected to be $430,000 and the salvage value of the machine at the end of the third year could be $40,000. To maximize its ROI the company is borrowing the full purchase amount from a local bank at 12% annual interest, instead of funding the purchase from its retained earnings (equity financing). The company believes it can arrange to pay the bank only the interest expenses over the project life and postpone the repayment of the principle of the borrowed amount until the end of the third year. MARR is 15%, and the corporate tax rate t =40% ( ignore depreciation). Can you help the company calculate the amount of gain or (loss) in the project NPV, due to debt financing of the project. Note: after tax revenues or expenses are calculated by multiplying before tax values by (1-t) Use excel to solve the following: Instructions Use excel to calculate NPV of the project for the equity financing option Calculate the NPV of the project for the debt financing option Calculate the gain or(loss) in the project NPV due to debt financing instead of equity financing.
A company is considering purchasing a special machine to expand one of its production lines. The machine costs $1,000,000 and has an estimated service life of 3 years annual after-tax revenue are expected to be $430,000 and the salvage value of the machine at the end of the third year could be $40,000. To maximize its
Can you help the company calculate the amount of gain or (loss) in the project NPV, due to debt financing of the project.
Note: after tax revenues or expenses are calculated by multiplying before tax values by (1-t)
Use excel to solve the following:
Instructions
- Use excel to calculate NPV of the project for the equity financing option
- Calculate the NPV of the project for the debt financing option
- Calculate the gain or(loss) in the project NPV due to debt financing instead of equity financing.
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