Question

13) Suppose, $50M of the project s financing is in the form of a 4-year bank loan requiring annual interest payments and a repayment of the principal at the maturity of the loan. Also suppose that the firm is paying a below market interest rate on the loan. Find the NPV of financing if the fair market interest rate on the loan is 9%, but the firm is paying only 8%. The tax rate is 40%

Answer 1

Ans:

Loan Amount : $50,000,000

Market rate of Interest : 9%

Finance rate : 8%

Annual Interest payments : $50,000,000 *8% = $4,000,000

Calculation of NPV of financing:

Year	Payment	PV factor @ 9%	Present value of Ouflows
1	$         4,000,000	0.91743	$                         3,669,725
2	$         4,000,000	0.84168	$                         3,366,720
3	$         4,000,000	0.77218	$                         3,088,734
4	$         4,000,000	0.70843	$                     38,254,961
		Total	$                     48,380,140

NPV of Financing : $50,000,000 - $48,380,140 = $1,619,860

After Tax benefits : $1,619,860 * 60% = $971,916.

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