Effects On Incentives To Borrow

Transcript for Effects on Incentives to Borrow

Link to the spreadsheet used in the above video

Simple Example:

You're a business and want to purchase a car. Car cost: $ $20,000, MARR: 10%, Combined tax rate: 30%

Choices: Buy with cash or finance with a loan (single payment next year, interest: 12%)

Because this is a service investment and you are looking at only changing the method of finance, you don't need to model common features like, depreciation, fuel use and maintenance.

  • Choice 1: Buy with Cash
Year Pre-Tax
0 -20,000
1 0

PW=-20,000

  • Choice 2: Loan
Year Pre-Tax Interest Expense Tax Savings After Tax
0 0 0 0 0
1 -22,400 2400 (2400*.3)=720 -21,680

PW=(-21,680)/1.1 = -19,709

Choose the method with the lowest present worth of cost and finance the car

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