Uptown Stores Is Contemplating the Acquisition of Some New Equipment

question 18

Multiple Choice

Uptown Stores is contemplating the acquisition of some new equipment. The purchase price is $52,000. The equipment would be depreciated using 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 would be worthless after that time. The equipment can be leased for $14,000 a year for 4 years. The firm can borrow money at 9 percent and has a 35 percent tax rate. What is the incremental annual cash flow for year 3 if the company decides to lease the equipment rather than purchase it?

• A) -$13,417
• B) -$11,797
• C) -$9,840
• D) -$7,597
• E) -$6,528

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Definitions:

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