You were unhappy that the project that you had proposed has been rejected as the NPV...

You were unhappy that the project that you had proposed has been rejected as the NPV is negative based on revised assumptions on the sales numbers.

How- ever, the next day the manager came and conveyed a good news, the state gov- ernment is willing to offer you a subsidized loan at 3% interest rate, which is 6% lower than the cost of debt of your firm, for a period of 5 years. The amount committed by the state government is INR 20 crores.

The contract that you have signed would expect you to pay back this loan amount in equal annual install- ments (includes interest and principal). What is the present value of the tax shield if you consider the loan without the subsidy? What is the present value of tax shields if you consider the subsidized interest rate?

What is the incremental bene- fit of the subsidized loan?

Expert Solution

jeff jeffy answered 2 years ago

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