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 $35,000. 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 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?

($6,760)

($14,318)

($11,442)

($10,986)

($5,966)

Please show in excel spreadsheet format as well Thank you

Explanation / Answer

Answer: ($11,442)

0 1 2 3 4 LEASING: After tax lease rent [9000*(1-0.34)] -5940 -5940 -5940 -5940 BUYING: Depreciation 11666 15554 5187 2594 Tax shield on depreciation at 34% 3966 5288 1764 882 Salvage value after tax (7000*0.66) 4620 Total annual cash flows 3966 5288 1764 5502 Incremental annual cash flow for leasing -9906 -11228 -7704 -11442 Answer: ($11,442)

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