Lester's can purchase a new machine for $128,000. The machine has a 4-year life and can be sold at the end of year 4 for $12,000. Lester's 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 $30,500 a year. The ﬁrm can borrow money at 8.8 percent and has a
34 percent tax rate. The company does not expect to owe any taxes for at least the next 5 years
Due to accumulated net operating losses. What is the incremental annual cash ﬂow for year 4 if the
Company decides to lease rather than purchase the equipment?

Question

Quizplus · Accepted Answer

The incremental annual cash flow for year 4 if the company decides to lease rather than purchase the equipment is -$42,500. This is because the company would save $30,500 in lease payments, but would also lose out on $12,000 in salvage value. The company would also have to pay taxes on the $12,000 salvage value, which would amount to $4,080. This results in a total incremental cash flow of -$42,500.

Lester's Can Purchase a New Machine for $128,000