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

Since the company does not expect to owe any taxes for at least 5 years, the tax shield from depreciation is not applicable. Therefore, the incremental cash flow for year 2 is simply the lease payment of -$21,000.

Your ﬁRm Is Considering Either Leasing or Buying Some New