($9,440) ($1,096) $5,992 ($16,152) ($26,410) Answer computed: Morrison Industria
ID: 2788747 • Letter: #
Question
($9,440)
($1,096)
$5,992
($16,152)
($26,410)
Answer computed:
Morrison Industrial Tool can either lease or buy some equipment. The lease payments will be $9,000 a year. The purchase price is $31,000. The equipment has a 3-year life after which time it is expected to have a resale value of $4,000. The firm uses straight-line depreciation, borrows money at 10 percent and has a 33 percent tax rate. What is the incremental cash flow for year 1 if the company decides to lease the equipment rather than purchase it?($9,440)
($1,096)
$5,992
($16,152)
Explanation / Answer
A. ($9,440)
The incremental cash flow for year 1 if the company decides to lease the equipment rather than purchase it is:
CF1 = -1 {[$9,000 (1 - 0.33)] + [($31,000/3) (0.33)]}
= -$9,440
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