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Composition between interest and principal payments changes

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A firm is considering taking a loan of $10,000 to finance a project. The CFO is considering the following three alternatives:

  1. A bullet loan that returns all the principal at the end of year 5 and makes yearly interest payments.
  2. A loan with 5 equal principal installments of $2,000 at the end of each year.
  3. A mortgage loan with 5 equal yearly payments (equal total payment each year but the composition between interest and principal payments changes over the years).

Suppose that the interest rate for each one of these loans is 8.5%. Which one of these loans generates the highest interest tax shield? You don't need to calculate the tax shield to answer the question.

Reference no: EM133114722

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