[nula1989]

Hi there, I have come across a question where part of the investment was financed by a bank loan and part of it by a subsidised loan.

The question read as following:
”The finance director has proposed the following finance package for the new investment:

$200m Bank loan, repayable in equal annual instalments over the project’s life,
interest payable at 6% per year
£300m Subsidised loan from a government loan scheme over the project’s life
on which interest is payable at 2.5%

Issue costs of 2% of gross proceeds will be payable on the subsidised loan. No issue costs will be payable on the bank loan. Issue costs are not allowable for tax.”

Subsidised loan benefit calculation included:

1. Tax benefit $300m × 2.5% × 20% × AF(6%, 4) = $5.20m
2. Subsidy benefit: $300m × (6% ?-2.5%) × (1 – 20%) × AF(6%, 4) = $29.11m
3. Issue costs

I am struggling to understand the logic behind the 2nd working. Could you explain this working step by step please?

Thank you,
N

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