Answered: Floopy Co has decided to purchase new…

Cornerstones of Financial Accounting

4th Edition

ISBN:9781337690881

Author:Jay Rich, Jeff Jones

Publisher:Jay Rich, Jeff Jones

Chapter9: Long-term Liabilities

Section: Chapter Questions

Problem 87E: Cost of Debt Financing Stinson Corporations cost of debt financing is 6%. Its tax rate is 30%....

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Floopy Co has decided to purchase new equipment. They are in the 38% tax bracket.

The desired equipment costs $77,000 and it can be financed entirely with a 12% loan which requires annual end-of-year payments of $32,059 for 3 years. The firm will depreciate the equipment under MACRS using a 3-year recovery period (depreciation is 33% in year 1, 45% in year 2 and 15% in year 3). The firm will pay $2,000 per year for a maintenance contract. Calculate the present value of the cash outflows for the purchase alternative. Use these templates below.

(1)
(3)
Beg. Of
Year
(4)
(2)
Loan
(5)
Amount
End
Interest
End of Year
(12%)
going to
Principle
(Column 3-
5)
of
Paymen
Year
ts
Prin
repay
principal
(Column 1-
4)
ciple
1
2
3
Tax
Shield
After-tax
End
Loan
Maint.
Dep
Int.
Total
Cash Outfld
of
Y
r
Pmt
Cost
Deductions
Year
After-tax
PV of
Cash Outflov Outflows @ 12%

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