Question

7) (35 points) EmKay, Inc. is considering the purchase of new automated equipment to increase its production capacity. For this purchase, the following data apply: Purchase price = $450,000 ($250,000 from own funds (equity) and $200,000 from a loan) Equipment Life: 4 years Depreciation: MACRS-GDS 3-year property Estimated salvage: $90,000 Effective tax rate: 35% EOY Expected O&M Costs Estimated revenue $30,000 $180,000 2 $40,000 $200,000 3 $50,000 $220,000 4 $60,000 $240,000 Conditions on loan: $200,000 borrowed at a nominal rate of 10% per year compounded annually. The loan is to be repaid over 3 years with equal annual payments. a) (10 points) Loan calculations - principal and interest payments. (Round off values to the nearest dollar) b) (25 points) Find the ATCF for each year of this investment (Round off values to the nearest dollar). EOY BT&LCF Loan Loan erest MACRS-GDS Taxable Income Там TCF Principal Payment Deduction Payment 0 1 2 3 4

Answer 1

1. We need to create debt repayment schedule. It has been created below.

Payment No. (months)	Beginning Balance (A) = Ending Balance	EMI (B)	Principal E=(B-C)	Interest ('C) = A*10%	Ending Balance (A-E)
1	2,00,000	80,423	60,423	20,000	1,39,577
2	1,39,577	80,423	66,465	13,958	73,112
3	73,112	80,423	73,112	7,311	-

EMI has been calculated in EXCEL =PMT(10%,3,200000)

2. Depreciation Schedule

Cost of Asset	4,50,000
Year	Rate	Depreciation
Year 1	33.33%	1,49,985
Year 2	44.45%	2,00,025
Year 3	14.81%	66,645
Year 4	7.41%	33,345

3. Calculation of Annual Taxable Inflows

EOY	Revenue	O&M Cost	Salvage Value	Total Inflow
N	A	B	C	D=A-B+C
-	-	-	-	-
1	1,80,000	30,000	-	1,50,000
2	2,00,000	40,000	-	1,60,000
3	2,20,000	50,000	-	1,70,000
4	2,40,000	60,000	90,000	2,70,000

4. Final table

EOY	BT & LCF	Loan principal payment	Interest Payment	MACRS Depreciation	Taxable Income	Tax	ATCF
N	A	B	C	D	E=A-D	F=E*35%	G=E-F+D
-	-4,50,000					-	-4,50,000	Capital Investment
1	1,50,000	60,423	20,000	1,49,985	15	5	1,49,995
2	1,60,000	66,465	13,958	2,00,025	-40,025	-14,009	1,74,009
3	1,70,000	73,112	7,311	66,645	1,03,355	36,174	1,33,826
4	2,70,000			33,345	2,36,655	82,829	1,87,171

Salvage value is fully taxable as it has been depreciated in full.

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