PROBLEM 1 - LOAN AMORTIZATION (30 points)

Part 1 - Acme Manufacturing is considering pursuing debt to help it finance some of its new capital expenditures. To help the company assess whether or not it can afford the debt, Acme wishes to develop an amortization schedule for the new debt that it is contemplating. Details on the debt are highlighted below:

Loan Term: 10 Years

Payment Terms:Monthly at the end of the month

Initial Principal Amount: $7,500,000

Interest Rate: 5.25% annualized

Develop an Amortization schedule for this particular loan. The schedule must show all payments associated with the loan.

Part 2 - Acme is also considering an alternative form of debt financing that includes a 2-year period where the company is only required to pay interest (no principal payments). The entire length of term for the note remains the same (10 years) so the amortization period on the loan is actually 8 years (2 years of interest-only payments and then 8 years of principal and interest payments). The amount of the principal remains the same at $7,500,000 and payments are still made at month-end. For this loan, however, the lender is going to charge an interest rate of 5.50% annualized. Develop an Amortization Schedule for this loan as well.

PLEASE DEVELOP LOAN AMORTIZATION SCHEDULES FOR BOTH PARTS 1 AND 2.

PROBLEM 2 - DETERMINING CASH FLOWS FOR A PROJECT

I am evaluating a new investment opportunity for my company that will be financed with debt and retained cash from current operations. My current market-based capital structure is 50% debt and 50% equity. The sources of capital for this new project will match my current market-based capital structure. The entire initial cost of the investment, excluding working capital, is $12,000,000 and this amount is fully depreciable over the life of the investment. In addition to this initial investment, I also plan to invest $1,000,000 (10% of my projected first year revenues) for my initial working capital needs. As my revenues grow, my working capital requirements will also grow annually at the rate of $1 for every $10 in projected revenue growth (10% of revenue growth). Required investments for working capital needs will occur at the end of every year based on anticipated revenues increases for the following year.

The proposed project has an estimated life of 10 years and no salvage value and I will account for depreciation expense for the project by applying straight-line depreciation. The debt I will use is bond-debt with an annual coupon rate of 7%.

My Year 1 revenue/sales attributable to the investment opportunity will total $10,000,000 and will increase 10% every year. Fixed costs total $1,500,000 per year (excluding depreciation expenses) and variable costs total $2,500,000 for year 1 and increase by 5% per year. In year 6 of the project, I will invest an additional $3 million into the project for capital upgrades to the investment.This capital investment has no salvage value and will be straight-line depreciated over a 5-year period beginning in year 6 and ending in year 10. I will evaluate this project against a weighted average cost of capital of 10%.My marginal tax rate is 21%.

From this information, determine the cash flows I should use for this investment from period 0 (my year 0 or initial investment cash outflow) through and including year 5. Develop an appropriate spreadsheet with an input/assumptions area as necessary to help you arrive at your calculations of the yearly cash flows.

BONUS:EXPAND YOUR SPREADSHEET TABLE TO INCLUDE ALL OF THE CASH FLOWS THROUGH AND INCLUDING YEAR 10 FOR A BONUS 10 POINTS. THIS IS A BIT TRICKY DUE TO THE WORKING CAPITAL FIGURE (WHAT HAPPENS TO IT AT THE END OF THE PROJECT?) AND THE HANDLING OF THE CAPITAL UPGRADE INVESTED IN YEAR 6.