Question

You work for Lowell Tech Company that is considering leasing an equipment. The equipment would cost $140,000 to buy and it would be depreciated straight-line to zero over eight years. The equipment will be completely valueless in eight years. Your company can lease the equipment for $28,500 per year for eight years. If the firm has a tax rate of 25%, What is the after-tax cash flow from leasing relative to the after-tax cash flow from purchasing the equipment in year 2? $21,500 $19,250 $22,750 -$25,750 -$23,250

Answer 1

After tax cash flow from leasing = -28500*(1-25%) =	$                -21,375
After tax cash flow from buying = (140000/8)*25% =	$                    4,375
Incremental cash flow in Year 2 =-21375-4375 =	$                -25,750