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You are the owner of a large data-services firm and are deciding on the purchase of...

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Finance

You are the owner of a large data-services firm and are decidingon the purchase of a new hardware cooling system that you expectwill yield $233,300 in cost-savings per year for the next 15 years.The installation of this cooling system will cost $3,000,000.

3. Suppose that you decide to finance the purchase of thissystem through a loan from the bank. The bank is willing to loanthis money over an 8 year term at an interest rate of 4% peryear.

a. Using a 70/30 debt-to-equity ratio, what is the NPV of thisproject?

i. (hint) calculate the yearly payment using excel function“PMT”

b. How does the NPV of this project change if a larger portionis financed through equity (e.g. debt-to-equity ratio of 60/40)?Why?

Answer & Explanation Solved by verified expert
3.6 Ratings (643 Votes)

Per yr earning        233,300.00
Annual rate 4%
One time outflow    3,000,000.00
Financed by: (70/30)
Debt    2,100,000.00 PMT (70/30 Debt-equity ratio) -311,908 ($311,908.45)
Equity        900,000.00
Case 2: Financed by: (60/40) PMT 60/40 Debt-equity ratio) -267350.0977 ($267,350.10)
Debt    1,800,000.00
Equity    1,200,000.00
Case 1 Year Cashflows Case 2 Year Cashflows
0 -900000 0    (1,200,000.00)
1 -78608.4473 1 -34050.09768
2 -78608.4473 2 -34050.09768
3 -78608.4473 3 -34050.09768
4 -78608.4473 4 -34050.09768
5 -78608.4473 5 -34050.09768
6 -78608.4473 6 -34050.09768
7 -78608.4473 7 -34050.09768
8 -78608.4473 8 -34050.09768
9 233,300 9 233,300
10 233,300 10 233,300
11 233,300 11 233,300
12 233,300 12 233,300
13 233,300 13 233,300
14 233,300 14 233,300
15 233,300 15 233,300
NPV ($919,651.91) NPV ($1,208,512.35)
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