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 when leasing rather than purchasing is the lease payment of $21,600, as there are no tax implications due to the net operating losses and no depreciation benefits from purchasing.

A ﬁRm Can Either Lease or Buy Some New Equipment