Your firm is considering either leasing or buying some new equipment. The lease payments will be $21,000 a year. The purchase price is $59,000. The equipment has a 3-year life after which time it is expected to have a resale value of $22,000. The equipment belongs in a 25 percent CCA class. Your firm borrows money at 8 percent, and normally has a 34 percent tax rate. The company does not expect to owe any taxes for at least 5 years because they have accumulated net operating losses. What is the incremental cash flow for year 2 if the company decides to lease the equipment rather than purchase it?
A) -$24,613
B) -$22,702
C) -$21,000
D) -$20,533
E) -$20,114

Question

Quizplus · Accepted Answer

The incremental cash flow for year 2 if the company decides to lease the equipment rather than purchase it is simply the lease payment, which is $21,000. Since the company does not expect to owe any taxes for at least 5 years due to accumulated net operating losses, tax shields from depreciation or interest are irrelevant in this calculation.

Your Firm Is Considering Either Leasing or Buying Some New