Vestas is concerned about the higher interest rate (8%) that NC Bank charges on the blades...

Transcribed Image Text:

Vestas is concerned about the higher interest rate (8%) that NC Bank charges on the blades loan. In comparison, the turbine loan is less expensive (7%). Given that NC Bank encourages voluntary loan principal repayments, with a 3% penalty, you want to investigate the possibility of repaying the blades loan principal as early as possible. Starting from the provided APV model, proceed as follows: A) Early repayment of blades loan (in "Financing") Insert a new independent variable that corresponds to the percentage of annual operating FCF that will be used to repay the loan principal, each year. You may consider starting at 10% of annual operating FCF to be used to repay the loan principal. Insert a new independent variable that corresponds to the annual penalty rate (3%) that NC Bank will charge on annual principal prepayments. Update the annual Financing Flows model for Blades loan so that it accounts for the two new independent variables. Blades Starting principal Interest Interest tax shield Prepayment on principal Annual penalty rate Ending principal 12/31/21 12/31/22 12/31/23 12/31/24 12/31/25 12/31/26 5,000,000,000 12/31/27 5,000,000,000 400,000,000 84,000,000 12/31/28 5,000,000,000 12/31/29 5,000,000,000 12/31/30 5,000,000,000 12/31/31 5,000,000,000 400,000,000 400,000,000 400,000,000 400,000,000 84,000,000 84,000,000 84,000,000 84,000,000 5,000,000,000 Net equipment 1 flows 5,000,000,000 5,000,000,000 (316,000,000) 5,000,000,000 NPV equipment 1 financing 228,838,268 5,000,000,000 5,000,000,000 5,000,000,000 (316,000,000) (316,000,000) (316,000,000) (5,316,000,000) Blades Purchase price Interest only loan maturity (years) Loan interest 5,000,000,000 5 8.00% Vestas is concerned about the higher interest rate (8%) that NC Bank charges on the blades loan. In comparison, the turbine loan is less expensive (7%). Given that NC Bank encourages voluntary loan principal repayments, with a 3% penalty, you want to investigate the possibility of repaying the blades loan principal as early as possible. Starting from the provided APV model, proceed as follows: A) Early repayment of blades loan (in "Financing") Insert a new independent variable that corresponds to the percentage of annual operating FCF that will be used to repay the loan principal, each year. You may consider starting at 10% of annual operating FCF to be used to repay the loan principal. Insert a new independent variable that corresponds to the annual penalty rate (3%) that NC Bank will charge on annual principal prepayments. Update the annual Financing Flows model for Blades loan so that it accounts for the two new independent variables. Blades Starting principal Interest Interest tax shield Prepayment on principal Annual penalty rate Ending principal 12/31/21 12/31/22 12/31/23 12/31/24 12/31/25 12/31/26 5,000,000,000 12/31/27 5,000,000,000 400,000,000 84,000,000 12/31/28 5,000,000,000 12/31/29 5,000,000,000 12/31/30 5,000,000,000 12/31/31 5,000,000,000 400,000,000 400,000,000 400,000,000 400,000,000 84,000,000 84,000,000 84,000,000 84,000,000 5,000,000,000 Net equipment 1 flows 5,000,000,000 5,000,000,000 (316,000,000) 5,000,000,000 NPV equipment 1 financing 228,838,268 5,000,000,000 5,000,000,000 5,000,000,000 (316,000,000) (316,000,000) (316,000,000) (5,316,000,000) Blades Purchase price Interest only loan maturity (years) Loan interest 5,000,000,000 5 8.00%