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

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?    A.  -$22,405 B.  -$16,805 C.  -$12,139 D.  -$8,184 E.  -$4,905 CF1 = -1 {[$12,400 (1 - 0.34)] + [($34,900/3) (0.34)]} = -$12,139

56.

A firm can either lease or buy some new equipment. The lease payments would be $18,500 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?    A.  -$29,165 B.  -$21,821 C.  -$18,500 D.  -$18,559 E.  -$17,635 CF3 = -1 ($18,500) = -$18,500

57.

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

58.

Frank's Auto Repair can purchase a new machine for $136,000. The machine has a 4-year life and can be sold at the end of year 4 for $12,000. Frank's 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 $35,900 a year. The firm can borrow money at 7.5 percent and has a 32 percent tax rate. The company does not expect to owe any taxes for at least the next 4 years due to net operating losses. What is the incremental annual cash flow for year 4 if the company decides to lease rather than purchase the equipment?    A.  -$47,900 B.  -$35,900 C.  -$20,900 D.  $15,900 E.  $35,900 CF4 = -1 ($12,000 + $35,900) = -$47,900

59.

You work for a nuclear research laboratory that is contemplating leasing a diagnostic scanner (leasing is a very common practice with expensive, high-tech equipment). The scanner costs $3.5 million and it would be depreciated straight-line to zero over 4 years. Because of radiation contamination, it will actually be completely valueless in 4 years. You can lease it for $875,000 per year for 4 years. Assume the tax rate is 33 percent. You can borrow at 10 percent before taxes. What is the net advantage to leasing from your company's standpoint?    A.  $468,216 B.  $491,319 C.  $516,007 D.  $530,468 E.  $541,747 Depreciation tax shield = ($3,500,000/4)(0.33) = $288,750 Aftertax lease payment = $875,000 (1 - 0.33) = $586,250 OCF = $288,750 + $586,250 = $875,000 Aftertax cost of debt = 0.1(1 - 0.33) = 0.067 NAL = $3,500,000 - $875,000(PVIFA6.7%, 4) = $516,007