Food Express is analyzing the purchase of some new equipment costing $73,000, which would be depreciated using the MACRS rates of 33.33 percent, 44.44 percent, 14.82 percent, and 7.41 percent over Years 1 to 4, respectively. The equipment can be leased for $19,600 a year for four years. The firm can borrow money at 9.5 percent and has a tax rate of 21 percent. What is the incremental annual cash flow for Year 2 if the company decides to lease the equipment rather than purchase it?
A) −$22,297
B) −$22,797
C) −$21,312
D) −$21,798
E) −$22,821

Question

Quizplus · Accepted Answer

The incremental annual cash flow for Year 2 if the company decides to lease the equipment rather than purchase it is -$22,297. This is calculated as follows:Lease payment: $19,600Depreciation expense: $32,561 (44.44% x $73,000)Interest expense: $6,935 ($73,000 x 9.5%)Tax savings: $6,843 (21% x $32,561)Incremental annual cash flow: -$22,297 ($19,600 - $32,561 + $6,935 + $6,843)

Food Express Is Analyzing the Purchase of Some New Equipment