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Hi,
Please assist:
Initial investment $300 000
NPV $88 000
Debt financed
20% taxCalculate APV
My answer is:
$88 000 + ($300000x loan interest rate) x 20% = APVHow do I calculate the loan interest? Or I should assume there is no loan interest but how do I calculate the tax saving?. In my understanding, the tax saving would be on the loan interest payment
300,000 x loan interest rate x tax rate is the annual tax saving from the loan finance.
If the loan is in perpetuity, use the perpetuity factor for the pre-interest cost of debt.
If the loan is for 5 yrs (say) use the 5 year cumulative discount factor at the pre-tax cost of debt.
The question needs to supply the interest rate for debt.
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