Project Financing (This Problem Is Taken Directly from
Eschenbach, 2003, pp. 348–350) A plant has a first cost
(capital investment at time = 0) of $900K. After 10 years,
the equipment salvage value is $100K; straight-line depreciation is used. Annual revenues will be $300K, and annual
operating and maintenance costs are $125K. The firm requires
an after-tax rate (MARR) of i = 9%. The effective tax rate is
40%.
Financing is available through a 5-year loan at 10%. The
uniform payments are made annually. Assume that 60% of
the project will be financed through a loan and 40% internally. The before-tax cash flow, BTCF = Revenue – O&M –
Loan payments. The taxable income, TaxInc = Revenue –
O&M – Depreciation – Interest payments. Year 0 will
include the first cost paid by the company ($−360K), and year
10 will include the salvage value ($100K).
Develop a spreadsheet to find the project after tax:
present value and internal rate of return. Allow the fraction
of the project to be financed to be a variable.