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Unformatted text preview: amortization technique described in Chapter 4. Dividing the present value interest factor for an annuity, PVIFA, from Table A–4 at
9% for 5 years (3.890) into the loan principal of $24,000 results in the annual loan payment of $6,170. (Note: If a
financial calculator were used, the annual loan payment would be $6,170.22.) For a more detailed discussion of
loan amortization, see Chapter 4. 678 PART 6 Special Topics in Managerial Finance Step 2 Therefore, the lease alternative results in annual cash outflows over the
5-year lease of $3,600. In the final year, the $4,000 cost of the purchase
option would be added to the $3,600 lease outflow to get a total cash
outflow in year 5 of $7,600 ($3,600 $4,000).
Step 2 The after-tax cash outflow from the purchase alternative is a bit more
difficult to find. First, the interest component of each annual loan payment must be determined, because the Internal Revenue Service allows
the deduction of interest only—not principal—from income for tax purposes.4 Table 16.1 presents the calculations necessary to split the loan
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- Fall '13