Question

Calculate the ATCF of the following investment (no ROR or NPV calculation is needed), considering a capital lease with following conditions:

Annual lease payments of $250,000 from year 1 to year 4

Effective annual interest rate of 6% for the borrowed money

Asset would yield the annual revenue of $350,000 for four years (from year 1 to year 4)

Asset would have operating cost of $50,000 for year 1 to 4

The asset can be depreciated based on MACRS 3-year life depreciation with the half year convention (table below) over four years (from year 1 to year 4)

Salvage value of $400,000 at the end of the 4th year

Income tax 40%

Year	1	2	3	4
Depreciation rate	33%	45%	15%	7%

Please calculate and include the lease principleand interest calculations.

Answer 1

STATEMENT OF PRINCIPAL & INTEREST PAYMENT

year	principal outstanding before repayment	annual installment(a)	Interest @ 6% (b)	principal repaid (a-b)
1	10,00,000	250,000	60,000	190,000
2	750,000	250,000	45,000	205000
3	500,000	250,000	30,000	220,000
4	250,000	250,000	15,000	235,000

COMPUTATION OF ATCF

1

year	Inflow after tax@40%(a) note.1	Principal (b)	Interest after tax (c)	Tax saving on depreciation (d) note 2	salvage value (after tax)	ATCF (a-b-c+d)
1	180,000	(190,000)	(36,000)	132,000		86,000
2	180,000	(205000)	(27,000)	180,000		128,000
3	180,000	(220,000)	(18,000)	60,000		2000
4	180,000	(235,000)	(9000)	28,000	240,000	204,000

Notes:.

1. cash inflow after tax= annual revenue from asset (1-tax rate @ 40%)

=300,000(1-0.40)

=180,000

2. Tax saving on depreciation

year 1 10,00,000*33%=330,000(depreciation)

330,000*40%=132,000(tax saving on depreciation)

similarily for year 2,3 & 4

3

4