Daily Enterprises Is Contemplating the Acquisition of Some New Equipment

question 181

Multiple Choice

Daily Enterprises is contemplating the acquisition of some new equipment. The purchase price is $47,000. The company expects to sell the equipment at the end of year 4 for $5,000. 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 $12,500 a year for 4
Years. The firm can borrow money at 7.5 percent and has a 34 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) -$10,266
• D) -$9,434
• E) -$8,766

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Definitions:

Premium

An additional amount over the normal cost, or the portion of insurance payments above the cost of the insured risk.

Discount

A reduction applied to the usual cost of goods or services, or in finance, an amount deducted from the face value of a bill of exchange or loan.

Par

The nominal or face value of a bond, stock, or coupon as indicated on a certificate or instrument.

Stockholders' Equity

The ownership stake of shareholders in a corporation's assets, remaining after all liabilities have been subtracted.