A firm can either lease or buy some new equipment. The lease payments would be $19,700 a year for 4 years. The purchase price is $72,900. The equipment has a 4-year life after which it is expected to have a resale value of $3,600. The firm uses straight-line depreciation over the life of the asset, borrows money at 11 percent, and has a 35 percent tax rate. The company does not expect to owe any taxes for at least 4 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

CF₃ = -1 ($19,700) = -$19,700

A Firm Can Either Lease or Buy Some New Equipment