Question

Daniel Kaffe, CFO of Kendrick Enterprises, is evaluating a 10-year, 6.5 percent loan with gross proceeds of $6,000,000. The interest payments on the loan will be made annually. Flotation costs are estimated to be 1.9 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 34 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. (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) Net present value $

b. Calculate the net present value of the loan including flotation costs. (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) Net present value $

Answer 1

a	Excluding flotation cost
	Year	0	1	2	3	4	5	6	7	8	9	10
	Gross proceeds	6000000
	Interest		390000	390000	390000	390000	390000	390000	390000	390000	390000	390000
	Tax @ 34%		132600	132600	132600	132600	132600	132600	132600	132600	132600	132600
	Net cash flow	Interest minus tax	257400	257400	257400	257400	257400	257400	257400	257400	257400	257400
	Net present value	7,850,404.90
a	Including flotation cost
	Year	0	1	2	3	4	5	6	7	8	9	10
	Gross proceeds	6000000
	Interest		390000	390000	390000	390000	390000	390000	390000	390000	390000	390000
	Flotation cost- ammortised	1.90%	11400	11400	11400	11400	11400	11400	11400	11400	11400	11400
	Cash flow before tax		378600	378600	378600	378600	378600	378600	378600	378600	378600	378600
	Tax @ 34%		128724	128724	128724	128724	128724	128724	128724	128724	128724	128724
	Net cash flow	Interest minus tax plus floatation cost	261276	261276	261276	261276	261276	261276	261276	261276	261276	261276
	Net present value	7,878,268.81