Amberle Co-Dec 2018 (Q-3)

Loans do not inflate!!!! The workings for the balances are shown in workings 5 of the answer. Each year interest is added at 8% (which is given in the question) and the repayment of 21,135 each year is subtracted. Because the repayment is an equal amount each year over 4 years, we get the amount of the annual repayment by dividing the amount of the loan (70,000) by the 4 year annuity factor at 8% (the interest on the loan).

Hi John, Looking at the solution of the tax shield on bank loan it seems like the cashflow has been discounting twice: 1) As you have just said the repayment on the bank loan is calculated by dividing $70m by the 4 year annuity factor at 8%; 2) Also once we have found the tax relief for each year the discount factor 8% is applied again; Can you please explain we couldn't just assume that the repayment was $18m per year ($70m/4) and than apply the discount rate as per point 2? Thanks

Sorry John: just realized that the first step is not discounting but compounding. Please ignore my query.

No problem :-)