Daily Enterprises is contemplating the acquisition of some new equipment. The purchase price is $47,000. The company expects to sell the equipment at the end of year 4 for $5,000. 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 $12,500 a year for 4 years. The firm can borrow money at 7.5 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?
A) -$14,434
B) -$12,734
C) -$10,266
D) -$9,434
E) -$8,766

Question

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The Answer of Daily Enterprises is contemplating the acquisition of some new equipment. The purchase price is $47,000. The company expects to sell the equipment at the end of year 4 for $5,000. 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 $12,500 a year for 4 years. The firm can borrow money at 7.5 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?
A) -$14,434
B) -$12,734
C) -$10,266
D) -$9,434
E) -$8,766

Daily Enterprises Is Contemplating the Acquisition of Some New Equipment