Consider the case of Shoe Building Inc. (SBI): Shoe Building Inc. (SBI) is considering the purchase of new manufacturing equipment that will cost $35,000 (including shipping and installation). SBI can take out a four-year, $35,000 loan to pay for the equipment at an interest rate of 8.40%. The loan and purchase agreements will also contain the following provisions: • The annual maintenance expense for the equipment is expected to be $350. • The equipment has a four-year depreciable life. The Modified Accelerated Cost Recovery System’s (MACRS) depreciation rates for a three-year asset are 33.33%, 44.45%, 14.81%, and 7.41%, respectively. • The corporate tax rate for SBI is 40%. Note: Shoe Building Inc. (SBI) is allowed to take a full-year depreciation tax-saving deduction in the first year. Based on the preceding information, complete the following tables: Value Annual tax savings from maintenance will be: $140 Year 1 Year 2 Year 3 Year 4 Tax savings from depreciation $4,666 $6,223 $2,073 $1,037 Net cash flow *****WHAT IS NET CASH FLOW?****
Consider the case of Shoe Building Inc. (SBI): Shoe Building Inc. (SBI) is considering the purchase of new manufacturing equipment that will cost $35,000 (including shipping and installation). SBI can take out a four-year, $35,000 loan to pay for the equipment at an interest rate of 8.40%. The loan and purchase agreements will also contain the following provisions: • The annual maintenance expense for the equipment is expected to be $350. • The equipment has a four-year depreciable life. The Modified Accelerated Cost Recovery System’s (MACRS) depreciation rates for a three-year asset are 33.33%, 44.45%, 14.81%, and 7.41%, respectively. • The corporate tax rate for SBI is 40%. Note: Shoe Building Inc. (SBI) is allowed to take a full-year depreciation tax-saving deduction in the first year. Based on the preceding information, complete the following tables: Value Annual tax savings from maintenance will be: $140 Year 1 Year 2 Year 3 Year 4 Tax savings from depreciation $4,666 $6,223 $2,073 $1,037 Net cash flow *****WHAT IS NET CASH FLOW?****
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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Question
Consider the case of Shoe Building Inc. (SBI):
Shoe Building Inc. (SBI) is considering the purchase of new manufacturing equipment that will cost $35,000 (including shipping and installation). SBI can take out a four-year, $35,000 loan to pay for the equipment at an interest rate of 8.40%. The loan and purchase agreements will also contain the following provisions:
| • | The annual maintenance expense for the equipment is expected to be $350. |
| • | The equipment has a four-year depreciable life. The Modified Accelerated Cost Recovery System’s (MACRS) |
| • | The corporate tax rate for SBI is 40%. |
Note: Shoe Building Inc. (SBI) is allowed to take a full-year depreciation tax-saving deduction in the first year.
Based on the preceding information, complete the following tables:
|
|
Value
|
|---|---|
| Annual tax savings from maintenance will be: | $140 |
|
|
Year 1
|
Year 2
|
Year 3
|
Year 4
|
|---|---|---|---|---|
| Tax savings from depreciation | $4,666 | $6,223 | $2,073 | $1,037 |
| Net |
*****WHAT IS NET CASH FLOW?****
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