Daily Enterprises is contemplating the acquisition of some new equipment.The purchase price is $46,000.The company expects to sell the equipment at the end of year 4 for $2,500.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 $12,300 a year for 4 years.The firm can borrow money at 7.5 percent and has a 35 percent tax rate.What is the incremental annual cash flow for year 4 if the company decides to lease the equipment rather than purchase it?
A)-$14,434
B)-$12,734
C)-$10,813
D)-$9,434
E)-$8,766

Question

Quizplus · Accepted Answer

CF₄ = -1 {[$12,300 (1 - 0.35)] + [$46,000 (0.0741) (0.35)] + [$2,500 (1 - 0.35)]} = -$10,813

Daily Enterprises Is Contemplating the Acquisition of Some New Equipment