A Firm Can Either Lease or Buy Some New Equipment

question 45

Multiple Choice

A firm can either lease or buy some new equipment.The lease payments would be $18,500 a year for 4 years.The purchase price is $72,900.The equipment has a 4-year life after which it is expected to have a resale value of $3,600.The firm uses straight-line depreciation over the life of the asset,borrows money at 11 percent,and has a 35 percent tax rate.The company does not expect to owe any taxes for at least 4 years because it has accumulated net operating losses.What is the incremental cash flow for year 3 if the company decides to lease rather than purchase the equipment?

• A)-$29,165
• B)-$21,821
• C)-$18,500
• D)-$18,559
• E)-$17,635

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Definitions:

Socializes

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Resocialization

The process by which individuals undergo a transformation in their personality through the deliberate manipulation of their environment, often within total institutions.

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A body of theories originating from Sigmund Freud, which posits that human behavior is deeply influenced by unconscious motives and conflicts.