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Extra info for How to Finance Energy Management Projects: Solving the "Lack of Capital Problem"
Like a loan or bond, PizzaCo owns and maintains the asset. Thus, the annual savings are only $950,000. PizzaCo pays annual dividends worth $400,000. At the end of year 5, PizzaCo expects to sell the asset for $1,200,000. Note that Table 2-7 is slightly different from the other tables in this chapter: Taxable Income = Savings – Depreciation, and ATCF = Savings – Stock Repurchases - Dividends - Tax Leases Firms generally own assets, however it is the use of these assets that is important, not the ownership.
By definition, the cost of capital (rate) for selling stock is: cost of capitalselling stock = D/P where D = annual dividend payment P = company stock price However, in most cases, the after-tax cost of capital for selling stock is higher than the after-tax cost of debt financing (using loans, bonds and capital leases). This is because interest expenses (on debt) are tax deductible, but dividend payments to shareholders are not. Payments Interest Total Principal Taxable Outstanding Income Tax ATCF 217,750 -37,250 137,750 262,750 463,375 530,625 74,035 -12,665 46,835 89,335 157,548 180,413 500,965 587,665 528,165 485,665 -2,082,548 1,019,588 Net Present Value at 18%: 953,927 —————————————————————————————————————————————— Notes: Loan Amount: 2,500,000 (used to purchase equipment at year 0) Loan Finance Rate: 0% MARR 18% Tax Rate 34% MACRS Depreciation for 7-Year Property, with half-year convention at EOY 5 Accounting Book Value at end of year 5: 669,375 Estimated Market Value at end of year 5: 1,200,000 EOY 5* illustrates the Equipment Sale and Book Value Taxable Income: =(Market Value - Book Value) =(1,200,000 - 669,375) = $530,625 —————————————————————————————————————————————— —————————————————————————————————————————————— 0 2,500,000 1 950,000 357,250 375,000 375,000 2,500,000 2 950,000 612,250 375,000 375,000 2,500,000 3 950,000 437,250 375,000 375,000 2,500,000 4 950,000 312,250 375,000 375,000 2,500,000 5 950,000 111,625 2,500,000 375,000 2,875,000 0 5* 1,200,000 669,375 2,500,000 —————————————————————————————————————————————— EOY Savings Depr.
A Simple Introduction to Financing Energy Management Projects 29 30 How to Finance Energy Management Projects true lease is effective for a short-term project, where the company does not plan to use the equipment when the project ends. A capital lease is effective for long-term equipment. The True Lease Figure 2-10 illustrates the legal differences between a true lease and a capital lease. A true lease (or operating lease) is strictly a rental agreement.