Daily Enterprises is contemplating the acquisition of some new equipment. The pu

Question

Daily Enterprises is contemplating the acquisition of some new equipment. The purchase price is $31,000. The equipment has a 4-year life. The company expects to sell the equipment at the end of year 4 for $7,000. The firm uses MACRS depreciation which allows for 33.33 percent, 44.44 percent, 14.82 percent, and 7.41 percent depreciation over years 1 to 4, respectively. The equipment can be leased for $9,000 a year. The firm can borrow money at 7 percent and has a 34 percent tax rate. What is the incremental annual cash flow for year 4 if the company decides to lease the equipment rather than purchase it?

Explanation / Answer

Calculation of increamental Cash flow in Year 4 depreciation in year 4 33000-7000 26000 1926.6 Savings in Taxes 1927*35% 674.31 550.237 If leased 9000*.816 7344 Increamental Cash Flow is $ -6574 The correct answer is A) -6574

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