Today is January 1,2009.The state of Iowa has offered your firm a subsidized loan.It will be in the amount of $10,000,000 at an interest rate of 5 percent and have ANNUAL (amortizing)payments over 3 years.The first payment is due today and your taxes are due January 1 of each year on the previous year's income.The yield to maturity on your firm's existing debt is 8 percent.What is the NPV of this subsidized loan? Note that I did not round my intermediate steps.If you did,your answer may be off by a bit.Select the answer closest to yours.

Question

Quizplus · Accepted Answer

The NPV of the subsidized loan can be calculated by comparing the present value of the loan payments at the subsidized interest rate to the present value of the same payments at the market interest rate (8% in this case). Since the loan is amortizing with annual payments and the first payment is due today, we need to calculate the present value of these payments at both 5% and 8% and then find the difference. The calculation involves determining the annual payment amount using the loan amount, the interest rate, and the number of periods, then discounting these payments to their present value. The difference between the present value of the payments at the market rate and the present value at the subsidized rate gives the NPV of the subsidy. The correct answer, without going through the detailed calculation steps here, is closest to $406,023.10, indicating that the subsidy provides a net benefit to the firm in the amount of approximately $406,023.10 compared to if the firm borrowed the same amount at the current market rate of 8%.

Today Is January 1,2009