Morrison Industrial Tool can either lease or buy some equipment.The lease payments would be $12,400 a year.The purchase price is $34,900.The equipment has a 3-year life after which it is expected to have a resale value of $5,500.The firm uses straight-line depreciation over the asset's life,borrows money at 8 percent,and has a 34 percent tax rate.What is the incremental cash flow for year 1 if the company decides to lease the equipment rather than purchase it?

Question

Quizplus · Accepted Answer

CF₁ = -1 {[$12,400 (1 - 0.34)] + [($34,900/3) (0.34)]} = -$12,139

Morrison Industrial Tool Can Either Lease or Buy Some Equipment