Lester's Can Purchase a New Machine for $128,000

question 223

Multiple Choice

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

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