Question

M to Problem 12-31. To he Slly 12-31. To help pay for the pickup VM Corp. obtained a $20,000 loan dealer, payable in four end-of-year 5000 plus 10% interest on the loan TOE the manag and o 42.43 Refer to p truck, the BVM C from the truck dealer year. inves payments 20-ye balance each year. (a) Compute the after mpute the after-tax rate of return for the ther with the loan. Note that the inter- the loan is tax deductible, but the $5000 truck together with the est on the loan is tax Year of s. principal payments are not hy is the after-tax rate of return computed irt (a) different from the rate obtained in 12-46 A (A con bui (b) Why is the aft in part (a) differen Problem 12-31? (c) Assume now tha ume now that the loan is paid off as a uniform payment loan at 10% per year. Com- ute the after-tax rate of return with this loan arrangement.

only part C needs to be answered

Answer 1

Loan anvount = $ 20 ovo Payment in jou end of blus 10% interest on the yeau payments of $5000 loan balanu each year. (0) Loan is paid off as a uniform payment loan at 10% per year . Using the fainula of Unifam Annual series & Present value in pe A [ (1+i)"-1 ] when i = interest rate payable n = no of years. A = Annual Payment ushuru tu i s bar = Principal loan amount. A = P L Å (1+0)") H (+i)"-L -1) wielu = 20 ovo Lol(1:1)+) 11)*- In 200vo (0.146 = $ 629107 bib list 0.464) o $ 6.292 Cabbeox) von How to be years - (Uniform paymeals)

| Aftu tax rate of retuum ý the actual financial I benefit of an investment after accounting for the effects of inflation and taxes. O Formula : Nonienal Rettunx (i- tax rate Sinu, nominal retun heu is equivalent to I interest earned on loan anant which equals 10% we have 1 10% (I-tax rate) = After two nate of ز- زءا - سلیم NOTE: since, here in the question, we have not been provided with tax rate, it is advisable to check the information (i any available regarding tax rate and thereby to! be put in the above fonula.