PS # 8 Q1.
A firm is considering purchasing an asset of $12,000 with $7,000 of this amount coming from equity and remaining being borrowed for 3 years at an effective interest rate of 12% per year. Uniform annual payments, consisting of interest and loan principals, will be utilized to repay the $5,000 loan. Straight-line depreciation over a 3-year period can be claimed, the asset’s salvage value at this time is expected to be $3,000, and 10% investment tax credit is taken. Before-tax income from the asset is estimated to be $5,000 per year. The firm’s effective income tax rate is 50%. Inflation and revaluation rates are forecasted to be 20% and 10%, respectively. If real after-tax MARR = 10%, develop a current ATCF analysis and decide whether this investment is profitable.
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