Floopy Co has decided to purchase new equipment. They are in the 38% tax bracket. The desired equipment costs $77,000 and it can be financed entirely with a 12% loan which requires annual end-of-year payments of $32,059 for 3 years. The firm will depreciate the equipment under MACRS using a 3-year recovery period (depreciation is 33% in year 1, 45% in year 2 and 15% in year 3). The firm will pay $2,000 per year for a maintenance contract. Calculate the present value of the cash outflows for the purchase alternative. Use these templates below.
Floopy Co has decided to purchase new equipment. They are in the 38% tax bracket. The desired equipment costs $77,000 and it can be financed entirely with a 12% loan which requires annual end-of-year payments of $32,059 for 3 years. The firm will depreciate the equipment under MACRS using a 3-year recovery period (depreciation is 33% in year 1, 45% in year 2 and 15% in year 3). The firm will pay $2,000 per year for a maintenance contract. Calculate the present value of the cash outflows for the purchase alternative. Use these templates below.
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
Related questions
Question
Floopy Co has decided to purchase new equipment. They are in the 38% tax bracket.
The desired equipment costs $77,000 and it can be financed entirely with a 12% loan which requires annual end-of-year payments of $32,059 for 3 years. The firm will
Transcribed Image Text:### Loan Repayment and Cash Flow Analysis
#### Table 1: Loan Repayment Schedule
1. **End of Year**:
- Row entries: 1, 2, 3
2. **Loan Payments**:
- Column for annual loan payments.
3. **Beginning of Year Principle**:
- Starting principal amount at the beginning of each year.
4. **Interest (12%)**:
- Annual interest rate applied to the beginning principal.
5. **Amount Going to Repay Principal (Column 1-4)**:
- Portion of the loan payment that goes toward repaying the principal, calculated as Loan Payments minus Interest.
6. **End of Year Principle (Column 3-5)**:
- Remaining principal at the end of the year after repayment.
#### Table 2: Deductions and Cash Outflows
1. **End of Year**:
- Row entries: Reflect end of each year, aligning with Table 1.
2. **Loan Payment**:
- Annual loan payment amount.
3. **Maintenance Cost**:
- Regular maintenance expenses.
4. **Depreciation (Dep.)**:
- Annual depreciation costs.
5. **Interest (Int.)**:
- Interest expense to be included.
6. **Total Deductions**:
- Sum of maintenance, depreciation, interest, and other deductions.
7. **Tax Shield**:
- Tax savings from deductions.
8. **After-tax Cash Outflow**:
- Net cash outflow after accounting for the tax shield.
#### Table 3: Present Value Analysis
1. **Year**:
- Corresponds to the end of year values in the previous tables.
2. **After-tax Cash Outflow**:
- Cash outflows calculated after tax effects.
3. **PV of Outflows @ 12%**:
- Present value of future cash outflows discounted at 12%.
These tables assist in evaluating the financial impact of loan payments, deductions, and cash flow over a three-year period, incorporating a 12% interest and discount rate.
Expert Solution
This question has been solved!
Explore an expertly crafted, step-by-step solution for a thorough understanding of key concepts.
This is a popular solution!
Trending now
This is a popular solution!
Step by step
Solved in 4 steps
Knowledge Booster
Learn more about
Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, finance and related others by exploring similar questions and additional content below.Recommended textbooks for you
Essentials Of Investments
Finance
ISBN:
9781260013924
Author:
Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:
Mcgraw-hill Education,
Essentials Of Investments
Finance
ISBN:
9781260013924
Author:
Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:
Mcgraw-hill Education,
Foundations Of Finance
Finance
ISBN:
9780134897264
Author:
KEOWN, Arthur J., Martin, John D., PETTY, J. William
Publisher:
Pearson,
Fundamentals of Financial Management (MindTap Cou…
Finance
ISBN:
9781337395250
Author:
Eugene F. Brigham, Joel F. Houston
Publisher:
Cengage Learning
Corporate Finance (The Mcgraw-hill/Irwin Series i…
Finance
ISBN:
9780077861759
Author:
Stephen A. Ross Franco Modigliani Professor of Financial Economics Professor, Randolph W Westerfield Robert R. Dockson Deans Chair in Bus. Admin., Jeffrey Jaffe, Bradford D Jordan Professor
Publisher:
McGraw-Hill Education