Corporate Finance - 75930

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  • From: Business, Finance
  • Due on: Sun 07 Dec, 2014 (11:13am)
  • Asked on: Fri 05 Dec, 2014
  • Due date has passed, but you can still Post Solution.
  1. In this first step of your project, you’ll need to create a loan

amortization schedule.

The following table illustrates the payments

and interest amounts for a fixed-rate, 30-year mortgage

loan. The total amount of the mortgage is $300,000, and the

interest rate is 6 percent. This mortgage requires monthly

payments of $1,798.65, with a final payment of $1,800.23.

The table was created in Excel.

The following is an explanation of the columns in the table:

? The first column in the table, with the heading “Payment

Number,” shows the 360 payments required to pay off

the mortgage loan (30 years, with 12 monthly payments

per year).

129The second column, with the heading “Payment Amount,”

shows the monthly payment amount.

? The third and fourth columns show the portion of the

monthly payment paid for interest, and the portion paid

towards the principal.

? The fifth column, headed “Balance,” shows the starting

balance of $300,000, and the remaining balance each

month after the principal is subtracted.

? The sixth column, headed “Current,” reflects the current

portion of the principal (12 months).

? The amounts in the “Non-Current” column are calculated

by subtracting the current portion of the principal from

the total balance.

? The “Annual Interest Expense” column provides a running

total of the interest expense on the mortgage for the

entire 12-month period.

? The “Totals” under the “6% Interest Expense” and “Principal”

columns show the final totals for the 30-year life of the


130Once you’ve determined how each of the amounts in the table

are obtained, you can calculate them and fill them in for all

360 payments

The balance of this mortgage, after the first payment, is

$299,701.35. If a classified balance sheet were prepared

on this date, the current portion of the mortgage would

be $3,702.44, and the noncurrent portion of the mortgage

would be $295,998.91.

If you were to create a chart of the interest and principal

components of each mortgage payment, over the life of the

mortgage, it would look like the following illustration:








  1. The next step in your project is to create a depreciation

schedule for the (fictional) property purchased with this

loan. When the property was purchased, an appraisal was

performed. The property included separate components of

land and improvements (the building), and also included

some fixtures (appliances, such as a refrigerator). You paid

a slightly higher appraisal fee than usual, and instructed

the appraiser to provide you with the following breakdown

of values: Your mortgage loan cost of $300,000 must be allocated between

these different asset classes, so you can use the appropriate

depreciable life to prepare a depreciation schedule, as shown

in the following illustration:

Now, you’ll need to use the MACRS tables to determine the

amount of depreciation expense. Assume that the “improvements”

represent 39-year, nonresidential rental property and

the “fixtures” represent 7-year property. Create a depreciation

schedule using the MACRS tables on pages 308–309 of your

textbook. Create annual measures and a source document

for annual financial statement preparation. Your textbook

didn’t provide a depreciation schedule for the 39-year, nonresidential

real property, so we’ve provided one below. The

measures in the table represent the percentage by which the

improvements to the real property may be depreciated, per

year, based on the month placed in service, which in this

case was January:

The amounts in this table are carried out to the third decimal

place, so some rounding errors will prevent the improvements

from being fully depreciated through year 39. You should

prepare the depreciation schedule only through year 30, to

match the loan amortization schedule you prepared in Step 1

of the project. To check your work, you can use the following

figure, which shows part of the completed depreciation schedule:


Create a Schedule Combining

Interest Expenses and DepreciationExpenses


  1. 3In this step, you’ll need to create a schedule that combines

interest expenses and depreciation expenses, but only for the

first 10 years of the life of the asset. Here is how the completed

schedule should appear:

  1.  In this step of your project, you’ll need to convert the interest

expense and depreciation expense from pretax to aftertax dollars.

Assume the firm is subject to a 34 percent marginal tax

rate, and convert the 10-year schedule of interest expense

and depreciation expense to aftertax terms. Review Lesson 3,

Assignment 9, to obtain the applicable formulas.

Remember from your lessons that operating and interest

expense results in a cash outflow, and depreciation expense

results in a cash inflow, from the depreciation tax shield.

Therefore, in this step, you’re computing a net cash outflow.

The following illustration shows how the completed schedule

should appear, with the combined annual interest expense

and depreciation expense, both converted to aftertax terms.


5..In this step of your project, you’ll need to calculate the present

values and net present values of the aftertax cash flows or

expenses for the project. In this case, this is the present value,

aftertax cash outflow.

You’ve calculated the aftertax cash flows for the interest

expense and the depreciation expense associated with the

purchase of this piece of non-residential real property. Now,

the final step requires you to calculate the present value of

these ATCFs for each year, and the NPV for these expenses,

in aggregate.

Using a discount rate of 10 percent, extend the table completed

in Step 4 by adding a column for the present value of ATCFs.

You’ll find a “present value of $1” table on pages A-4 and A-5

of your textbook (near the back of the book). The following

illustration shows how the completed table should appear.


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