NPV of Loans Daniel Kaffe, CFO of Kendrick Enterprises, is evaluating a 10-year, 8 percent loan with gross proceeds of $5,350,000. The interest payments on the loan will be made annually. Flotation costs are estimated to be 1.25 percent of gross proceeds and will be amortized using a straight-line schedule over the 10-year life of the loan. The company has a tax rate of 40 percent, and the loan will not increase the risk of financial distress for the company.
a. Calculate the net present value of the loan excluding flotation costs.
b. Calculate the net present value of the loan including flotation costs.
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