Question: You are interested in buying a machine that will produce sales of $50,000 in each of the next six years. The machine costs $120,000 and has a six year life. It is straight line depreciated to a zero salvage value. In addition, the machine activity costs $18,000 annually. The discount rate you decided to use for the machine's FCF is 12%. You are considering taking a 9%, six-year, loan to finance the purchase of the machine. The loan amount will be $70,000. The loan terms specify annual payments of interest only in years 1-5 and the repayment of the whole principal in year 6. Assuming that the corporate tax rate is TC = 40%, the personal tax rate (on ordinary income) is TD = 22% and the equity tax rate is TE = 15%, answer the following:
a. What is the machine FCF? 18.b. What is the NPV of the machine if it is financed with equity only?
b. Calculate the "net advantage of corporate debt," T.
c. What is the NPV of the machine if it is financed with a mix of equity and debt?