Asked by

Rimsha mujahid
on Dec 08, 2024

verifed

Verified

Lester's can purchase a new machine for $128,000. The machine has a 4-year life and can be sold at the end of year 4 for $12,000. Lester'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 $30,500 a year. The firm can borrow money at 8.8 percent and has a 34 percent tax rate. The company does not expect to owe any taxes for at least the next 5 years due to accumulated 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) -$42,500
B) -$37,675
C) -$31,275
D) -$24,905
E) -$23,335

MACRS Depreciation

A method of depreciation in the United States that allows for accelerated depreciation of assets under the tax code.

Incremental Cash Flow

is the additional operating cash flow that an organization receives from taking on a new project.

  • Absorb the theory behind depreciation tax shields and its significance on decisions to lease or purchase.
  • Absorb the impact that varied tax rates have on opting between leasing and purchasing.
  • Analyze the impact of tax loss carryovers on financial decisions related to leasing versus purchasing.
verifed

Verified Answer

AC
Angelina CilliDec 11, 2024
Final Answer:
Get Full Answer