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: ValueAnnual tax savings from maintenance will be:$140 Year 1Year 2Year 3Year 4Tax savings from depreciation$4,666 $6,223 $2,073 $1,037 Net cash flow *****WHAT IS NET CASH FLOW?****

Net cash flow refers to the total amount of money received from sales and loans less the amount of…

Answered: Consider the case of Shoe Building Inc.…

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter14: Capital Structure Management In Practice

Section14.A: Breakeven Analysis

Problem 8P

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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?****

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