This is the continuation of Problem 12-21. Instead of paying $100,000 cash for the tools, the corporation will pay $20,000 now and borrow the remaining $80,000. The depreciation schedule will remain unchanged. The loan will be repaid by 4 equal end-of-year payments of $25,240. Prepare an expanded cash flow table that takes into account both the special tools and the loan.
(a) Compute the after-tax rate of return for the tools, taking into account the $80,000 loan.
(b) Explain why the rate of return obtained in part (a) is different from the rate of return obtained in Problem 12-21.
1. Interest on the loan is 10%, $25,240 = 80,000 (AlP, 10%,4). Each payment is made up of part interest and part principal. Interest portion for any year is 10% of balance due at the beginning of the year.
2. Interest payments are tax deductible (i.e., they reduce taxable income and thus taxes paid). Principal payments are not. Separate each $25,240 payment into interest and principal portions.
3. The Year-0 cash flow is -$20,000 (100,000 - 80,000).
4. After-tax cash flow will be before-tax cash flow - interest payment - principal payment - taxes.