TTC is planning to raise $3.25 million for three years at an interest rate of 7.
ID: 2782564 • Letter: T
Question
TTC is planning to raise $3.25 million for three years at an interest rate of 7.35 percent to finance their expansion. The Alban County Board of Commissioners has just offered the firm the $3.25 million they need at 5.25 percent if the firm builds in Alban County, pays the interest annually, and repays the principal at the end of three years. What is the net present value of the loan to TTC if the firm’s tax rate is 34 percent and it accepts the county’s offer?
$293,651.12
$212,100.00
$329,245.19
$186,415.92
$346,089.97
Explanation / Answer
So, annual interest payment = 3,250,000 x 5.25% = 170,625
Due to the tax shield associated with interest payment, after-tax interest payment = 170,625 x (1 - 34%) = $112,612.50
NPV = CF0 + CF1 / (1 + r) + CF2 / (1 + r)^2 + CF3 / (1 + r)^3
= 3,250,000 - 112,612.5 / (1 + 7.35%) - 112,612.5 / (1 + 7.35%)^2 - (3,250,000 + 112,612.5) / (1 + 7.35%)^3
= $329,245.19
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