A firm can either lease or buy some new equipment. The lease payments would be $21,600 a year for 4 years. The purchase price is $89,000. The equipment has a 4-year life after which it is expected to have a resale value of $7,500. The firm uses straight-line depreciation over the life of the asset, borrows money at 8.5 percent, and has a 34 percent tax rate. The company does not expect to owe any taxes for at least 6 years because it has accumulated net operating losses. What is the incremental cash flow for year 3 if the company decides to lease rather than purchase the equipment?

Question

Quizplus · Accepted Answer

The incremental cash flow for year 3 if the company decides to lease rather than purchase the equipment is simply the lease payment, as the tax implications and depreciation do not affect the cash flow directly in this scenario due to the company not owing taxes for at least 6 years. Therefore, the incremental cash flow is the lease payment of $21,600.

A Firm Can Either Lease or Buy Some New Equipment