Borrow to create PP&E, Balance Sheet gone wrong :(
Hey all,
Hopefully someone could shed some light on this issue that has left me wondering for too long..
- Borrow $10,000 to invest in PP&E at year 0, so the asset is 100% funded by debt.
- Loan has a grace period so we don't pay interest + principal instantly. Capitalise interest at 7% p.a.
- Using straight-line depreciation only, depreciate over 10 years $1,000 p.a. and re-invest 1,5% p.a. Ignore depreciation of re-investment for the time being.
- Assume that net income is positive from year 1 on, and we are net cash positive since financing outflows don't occur.
Initially the B.S. balances with $10,000 on liabilities and $10,000 on assets. Following year depreciation and re-investment hit assets, but due to no loan repayment, how will the balance sheet balance? I tried to simplify this but give me a shout if I could add more colour.
Thanks in advance!
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