Cross Town Express Is Contemplating the Acquisition of Some New

question 15

Multiple Choice

Cross Town Express is contemplating the acquisition of some new equipment.The purchase price is $74,000.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 $19,100 a year for 4 years.The firm can borrow money at 9.5 percent and has a 28 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)-$16,823
• B)-$15,797
• C)$14,312
• D)$15,797
• E)$16,823

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Definitions:

Gratuitous Promise

A promise made without expecting anything in return, often not legally enforceable due to the lack of consideration.

Certificated Options

Options to buy or sell assets, especially securities, which are recognized and documented by a certificate.

Transferable

The characteristic of an asset or a legal right that allows it to be legally transferred or assigned from one party to another.

Warrants

Legal documents issued by a court or government authority that give law enforcement the power to perform certain actions, such as arrests or searches; also refers to financial instruments granting the right to purchase stock at a specified price.