Interstate Services needs some equipment costing $61,000. The equipment has a 4-year life after which it will be worthless. The firm 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 $16,600 a year. The firm can borrow money at 7.5 percent and has a 36 percent tax rate. What is the incremental annual cash flow for year 2 if the company decides to lease the equipment rather than purchase it?

Question

Quizplus · Accepted Answer

CF₂ = -1 {[$16,600 (1 - 0.36)] + [$61,000 (0.4444) (0.36)]} = -$20,383

Interstate Services Needs Some Equipment Costing $61,000