ASSIGNMENT: Your department, the Dessert Division of Equity Partners Fast Food, Inc., needs to add a new piece of equipment to the production line. Since you are the Department Manager – Dessert Division, you oversee the project. The company CFO (Chief Financial Officer), Kim Jones, has requested that you prepare amortization schedules in Excel to compare the three loans that have been offered to the company to purchase the equipment. Be sure to use proper headings and formatting. She also requested a brief memorandum with your recommendation on which loan the company should use. She informed you that the analysis and recommendation will be provided directly to Sally Smith, CEO (Chief Executive Officer) and the Board of Directors. You are very aware that you work in the fast-food industry and have very slim margins and very tight cash flows. You know the board is very sensitive to cash flow. Your debt amortization tables should include the starting balance each year, total payments during the year, total principal payments each year, total interest payments each year, total interest expense each year, and the ending principal balance each year. Depreciation tables should include the starting book value each year, total depreciation expense each year, and the ending book value each year. Include total interest and depreciation expense for each year as well as the total expense over the life of the equipment. Your analysis and decision should consider annual cash flow needs, annual depreciation cost of the equipment, annual interest cost, and total expense impact to the income statement each year. The company uses straight-line depreciation over the useful life of the equipment. Assume there are no installation and set up costs; salvage value at $200,000.

Loan 1: Cost of equipment $1,200,000 with $100,000 required down payment, 10-year term installment note, 8% interest, and 15-year useful life.

Loan 2: Cost of equipment $1,200,000 with $400,000 required down payment, 7-year term installment note, 7% interest and 15-year useful life.

Loan 3: Cost of equipment $1,500,000 with no ($0) down payment, 10-year installment note, 0% interest, and 15-year useful life.

 

Answer rating: 100% (QA)

Solution Equipment Loan Analysis for Dessert Division See attached Excel file for amortization and d... View the full answer