Chapter - 21

Problem 5:
Present value of lease financing:
Years 0 1 2 3 4 5 6 7
Lease
Payment 16000 16000 16000 16000 16000 16000 16000 16000

Lease
Payment 0 -5600 -5600 -5600 -5600 -5600 -5600 -5600
Cash
Outflow 16000 10400 10400 10400 10400 10400 10400 10400

Present
value of
cash
outflow 16000 9647.495 8949.439 8301.892 7701.198116 7143.96857 6627.05804 6147.549
 8 Total

0
Cash
Borrowig
-5600 rate= 1.078

-5600

-3070.704 67447.8961
Problem 5: Annual
Depreciat
Years Marks ion
1 0.2 20,000
2 0.32 32,000
3 0.192 19,200
4 0.1152 11,520
5 0.1152 11,520
6 0.0576 5,760

Amortization Schedule:
Beginning Installme Ending
Year Balance nt Interest Principle Balance
0 100000 17973 12000 5973 94027 i 0.12
1 94027 17973 11283.24 6689.76 87337.24
2 87337 17973 10480.44 7492.56 79844.44
3 49844 17973 5981.28 11991.72 37852.28
4 71452 17973 8574.24 9398.76 62053.24
5 62053 17973 7446.36 10526.64 51526.36
6 51526 17973 6183.12 11789.88 39736.12
7 39736 17973 4768.32 39736 0

Present Value of Debt Financing Schedule:

Years 0 1 2 3 4 5 6 7 8
Installmnt 17973 17973 17973 17973 17973 17973 17973 17973 0
Payments
Salvage -20000
Value
Interest 0 12000 11283.24 10480.44 5981.28 8574.2 7446.36 6183.12
Payments
Depreciation 0 20000 32000 19200 11520 11520 5760
Tax Shield 0 11200 15149.134 10388.154 6125.448 7033 4622.226 2164.092
Benefit
After Tax
Salvage -13000
Value
Cash
Outflow 17973 6773 2823.866 7584.846 11847.55 10940 13350.77 15808.91 -13000
After Taxes

Present
Value of 17973 6282.931 2430.0016 6054.6701 8773.11 7514.9 8507.342 9344.812 -7128.42
Cash
Outflow

Total PV of Cash Outflows for debt financing 59752.363

Tax Rate 0.35
After Tax
Salvage 13000
value
i 0.078
Problem:6
Present Value of Lease Financing:
Years 0 1 2 3 4 5
Lease 17000 17000 17000 17000 17000
Payment

Tax Shield 5100 5100 5100 5100 5100

Benefits
After Tax
Cash 17000 11900 11900 11900 11900 -5100
Outflows

Present
Value of 17000 11121.5 10393.92 9713.94 9078.45 -3636.23
Cash
Outflows
Total
Present
Value 53671.5809
After tax borrowing rate 0.07
Depreciation Schedule:
Annual
Year MACRS(%) Depreciation
1 0.2 16000
2 0.32 25600
3 0.192 15360
4 0.1152 9216
Amortization Schedule:
Beginning Installment Principle Ending
Year Interest
Balance Payment Payment Balance
Installment
0 80000 19185.27 19185.27 60814.73 19185.27
Payment
1 60814.73 19185.27 6081.473 13103.797 47710.933 i 0.1
2 47710.933 19185.27 4771.093 14414.1767 33296.7563
3 33296.7563 19185.27 3329.676 15855.59437 17441.1619
4 17441.16193 19185.27 1744.116 17441.16193 0
Present Value of Debt financing:
Years 0 1 2 3 4 5

Installment Payment 19185.27 19185.27 19185.27 19185.27 19185.27

Salvage Value -16000
Depreciation Payment 16000 25600 15360 9216
Interest Payment 6081.47 4771.09 3329.68 1744.12
Tax Shield Benefit 6624.44 9111.33 5606.9 3288.04
After Tax Salvage Value -4800
After Tax Cash
Outflows 19185.27 12560.83 10073.94 13578.37 15897.24 -11200
Present Value of Cash
Outflow 19185.27 11739.09 8798.97 11084 12128 -7985.45
Total Present Value of
Cash Outflows 54949.88