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Unformatted text preview: yment (in column 4). 4. When the rate of interest on the loan used to finance the purchase just equals the cost of debt, the present value of
the after-tax loan payments (annual loan payments
interest tax shields) discounted at the after-tax cost of debt
just equals the initial loan principal. In such a case, it is unnecessary to amortize the loan to determine the payment
amount and the amounts of interest when finding after-tax cash outflows. The loan payments and interest payments
(columns 1 and 4 in Table 16.2) can be ignored, and in their place, the initial loan principal ($24,000) is shown as an
outflow occurring at time zero. To allow for a loan interest rate that is different from the firm’s cost of debt and for
easier understanding, here we isolate the loan payments and interest payments rather than use this computationally
more efficient approach.
5. The year-6 depreciation is ignored, because we are considering the cash flows solely over a 5-year time horizon.
Similarly, depreciation on the leased asset, when it is purchased at the end of the lease f...
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This document was uploaded on 01/19/2014.
- Fall '13