Homework Answers
After tax cost of debt = 11%(1-t)
=11%(1-0.35)
=11%(0.65)
=7.15%
Statement showing NPV
| Particulars | 0 | 1 | 2 | 3 | 4 | NPV = Sum of PV |
| Purchase of machine | -200000 | |||||
| Savings in lease payments | 42000 | 42000 | 42000 | 42000 | ||
| Less: Depreciation | 50000 | 50000 | 50000 | 50000 | ||
| PBT | -8000 | -8000 | -8000 | -8000 | ||
| Tax savings @ 35% | 2800 | 2800 | 2800 | 2800 | ||
| PAT | -5200 | -5200 | -5200 | -5200 | ||
| Add: Depreciation | 50000 | 50000 | 50000 | 50000 | ||
| Annual Cash flow | 44800 | 44800 | 44800 | 44800 | ||
| Total cash flow | -200000 | 44800 | 44800 | 44800 | 44800 | |
| PVIF @ 7.15% | 1 | 0.9333 | 0.8710 | 0.8129 | 0.7586 | |
| PV | -200000 | 41811 | 39021 | 36417 | 33987 | -48765.38 |
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