Morrison Industrial Tool can either lease or buy some equipment. The lease payme

Question

Morrison Industrial Tool can either lease or buy some equipment. The lease payments will be $9,000 a year. The purchase price is $31,000. The equipment has a 3-year life after which time it is expected to have a resale value of $4,000. The firm uses straight-line depreciation, borrows money at 10 percent and has a 33 percent tax rate.

What is the incremental cash flow for year 1 if the company decides to lease the equipment rather than purchase it?

($9,440)

($1,096)

$5,992

($16,152)

($26,410)

Please also show in excel spreadsheet thank you

Explanation / Answer

Answer :- Option a). ($ 9,440)

Explanation :- Incremental cash flow for the year 1 = [ (-) 9000 * (1 - 0.33) ] + [ (-) 31000 / 3 * 0.33 ]

= (-) 6030 + (-) 3410

= (-) 9440 i.e., ($ 9,440).

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