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 $6,000. 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 $8,000 a year. The firm can borrow money at 9 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

Cash flow ( Year 4 )

=-1*(8000*(1-0.34)+(31000*(0.0741)*(0.34)+6000*(1-0.34)))= -10021

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