d. Calculate the series of NATCFs and the NPV for this project at a 10% discount rate assuming that you finance the investment using a 7-year loan with a fixed interest rate of 6% (annual compounding and end-of-year payments) and a 50% down payment. Complete the final two columns of Table 1 below.
Hint: This will require you to adjust the NATCF calculations that you made for part a. You will need to account for the loan when calculating the NATCF series. You can assume the bar is able to deduct the interest portion of the loan payments as an expense for income tax purposes. This should be done using a similar table as you created for part a, adding columns for the loan payment information. Clearly label your tables to help with grading. An example layout for the NATCF table with the loan is provided on page
e. Finally, using NPV as your decision criteria and a 10% discount rate, should you upgrade the sound system in the bar and, if so, should you pay cash or use a loan to finance the investment? Very briefly justify/explain your answer.
WITH LOAN | ||||||||||||||
Pv | Loan amount=48000/2 | $24,000 | ||||||||||||
Rate | Interest Rate | 6% | ||||||||||||
Nper | Number of years of loan | 7 | ||||||||||||
PMT | Annual Loan repayment | $4,299.24 | (Using PMT function of excel with Rate=6%, Nper=7, Pv=-24000) | |||||||||||
A | B | C=A*6% | D=B-C | E=A-D | ||||||||||
Year | Beginning Loan Balance | Total Loan Repayment | Interest | Principal | Ending Loan Balance | |||||||||
1 | $24,000 | $4,299.24 | $1,440.00 | $2,859.24 | $21,140.76 | |||||||||
2 | $21,140.76 | $4,299.24 | $1,268.45 | $3,030.79 | $18,109.96 | |||||||||
3 | $18,109.96 | $4,299.24 | $1,086.60 | $3,212.64 | $14,897.32 | |||||||||
4 | $14,897.32 | $4,299.24 | $893.84 | $3,405.40 | $11,491.92 | |||||||||
5 | $11,491.92 | $4,299.24 | $689.52 | $3,609.73 | $7,882.20 | |||||||||
6 | $7,882.20 | $4,299.24 | $472.93 | $3,826.31 | $4,055.89 | |||||||||
7 | $4,055.89 | $4,299.24 | $243.35 | $4,055.89 | ($0.00) | |||||||||
967.25 | ||||||||||||||
N | A | B | C | D | E | F=D+E | G=A-B-C-E | H=G*0.25 | I=G-H-D+C | PV=I/(1.1^N) | ||||
Year | Inflows | Outflows | Depreciation | Principal | Interest | Total Loan Repayment | Taxable Income | Taxes(25%) | Total after tax cash Flow | PV at 10% Discount | ||||
0 | ($24,000) | ($24,000) | ||||||||||||
1 | $15,000 | $5,000 | $8,000 | $2,859.24 | $1,440.00 | $4,299.24 | $560.00 | $140.00 | $5,560.76 | $5,055.24 | ||||
2 | $15,450 | $5,100 | $8,000 | $3,030.79 | $1,268.45 | $4,299.24 | $1,081.55 | $270.39 | $5,780.37 | $4,777.17 | ||||
3 | $15,913.50 | $5,202 | $8,000 | $3,212.64 | $1,086.60 | $4,299.24 | $1,624.90 | $406.23 | $6,006.03 | $4,512.42 | ||||
4 | $16,390.91 | $5,306.04 | $8,000 | $3,405.40 | $893.84 | $4,299.24 | $2,191.03 | $547.76 | $6,237.87 | $4,260.55 | ||||
5 | $16,882.63 | $5,412.16 | $8,000 | $3,609.73 | $689.52 | $4,299.24 | $2,780.95 | $695.24 | $6,475.99 | $4,021.08 | ||||
6 | $17,389.11 | $5,520.40 | $8,000 | $3,826.31 | $472.93 | $4,299.24 | $3,395.78 | $848.94 | $6,720.53 | $3,793.56 | ||||
7 | $17,910.78 | $5,630.81 | $4,055.89 | $243.35 | $4,299.24 | $12,036.62 | $3,009.15 | $4,971.58 | $2,551.20 | |||||
8 | $18,448.11 | $5,743.43 | $12,704.68 | $3,176.17 | $9,528.51 | $4,445.12 | ||||||||
9 | $19,001.55 | $5,858.30 | $13,143.25 | $3,285.81 | $9,857.44 | $4,180.52 | ||||||||
10 | $19,571.60 | $5,975.46 | $13,596.14 | $3,399.04 | $10,197.11 | $3,931.43 | ||||||||
SUM | $17,528 | |||||||||||||
NPV at 10% Discount | $17,528 | |||||||||||||
Yes, We should upgrade the system | ||||||||||||||
NPV is Positive | ||||||||||||||
Part a , b and c are shown in uploaded image | ||||||||||||||
d. Calculate the series of NATCFs and the NPV for this project at a 10% discount rate assuming that you finance the inve...
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