Problem:
Daniel Kaffe, CFO of Kendrick Enterprises, is evaluating a 10-year, 5.90 percent loan with gross proceeds of $5,350,000. The interest payments on the loan will be made annually. Flotation costs are estimated to be 2.90 percent of gross proceeds and will be amortized using a straight-line schedule over the 10-year life of the loan. The company has a tax rate of 40 percent, and the loan will not increase the risk of financial distress for the company.
Requirement:
Question 1: Calculate the net present value of the loan excluding flotation costs.
Question 2: Calculate the net present value of the loan including flotation costs.
Note: Provide support for rationale.