Michael Cleaners needs a new steam finishing machine that costs $100,000. The company is evaluating whether it should lease or purchase the machine. The equipment falls into the MACRS 3-year class, and it would be used for 4 years and then sold, because the firm plans to move to a new facility at that time. The estimated value of the equipment after 4 years is $10,000. A maintenance contract on the equipment would cost $3,000 per year, payable at the beginning of each year. Alternatively, the firm could lease the equipment for 4 years for a lease payment of $29,000 per year, payable at the beginning of each year. The lease would include maintenance. Due to special circumstances, the firm is in the 20% tax bracket, and it could obtain debt at a before-tax cost of 10%. If there is a positive Net Advantage to Leasing the firm will lease the equipment. Otherwise, it will buy it. MACRS rates for Years 1 to 4 are 0.3333, 0.4445, 0.1481, and 0.0741. What is the difference in cash flow at inception (Buying Cash flow compared to Leasing Cash flow) - ignore cash inflow of any external debt on the buy-side? a. Buying cash out flow $59,200 higher than leasing cash flow b. Buying cash out flow $71,000 higher than leasing cash flow c. Buying cash out flow $79,200 higher than leasing cash flow d. Buying cash out flow $74,000 higher than leasing cash flow

Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
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Michael Cleaners needs a new steam finishing machine that costs $100,000.
The company is evaluating whether it should lease or purchase the machine.
The equipment falls into the MACRS 3-year class, and it would be used for 4
years and then sold, because the firm plans to move to a new facility at that
time. The estimated value of the equipment after 4 years is $10,000. A
maintenance contract on the equipment would cost $3,000 per year, payable at
the beginning of each year. Alternatively, the firm could lease the equipment for
4 years for a lease payment of $29,000 per year, payable at the beginning of
each year. The lease would include maintenance. Due to special circumstances,
the firm is in the 20% tax bracket, and it could obtain debt at a before-tax cost
of 10%. If there is a positive Net Advantage to Leasing the firm will lease the
equipment. Otherwise, it will buy it. MACRS rates for Years 1 to 4 are 0.3333,
0.4445, 0.1481, and 0.0741.
What is the difference in cash flow at inception (Buying Cash flow compared to
Leasing Cash flow) - ignore cash inflow of any external debt on the buy-side?
a. Buying cash out flow $59,200 higher than leasing cash flow
b. Buying cash out flow $71,000 higher than leasing cash flow
c. Buying cash out flow $79,200 higher than leasing cash flow
d. Buying cash out flow $74,000 higher than leasing cash flow
Transcribed Image Text:Michael Cleaners needs a new steam finishing machine that costs $100,000. The company is evaluating whether it should lease or purchase the machine. The equipment falls into the MACRS 3-year class, and it would be used for 4 years and then sold, because the firm plans to move to a new facility at that time. The estimated value of the equipment after 4 years is $10,000. A maintenance contract on the equipment would cost $3,000 per year, payable at the beginning of each year. Alternatively, the firm could lease the equipment for 4 years for a lease payment of $29,000 per year, payable at the beginning of each year. The lease would include maintenance. Due to special circumstances, the firm is in the 20% tax bracket, and it could obtain debt at a before-tax cost of 10%. If there is a positive Net Advantage to Leasing the firm will lease the equipment. Otherwise, it will buy it. MACRS rates for Years 1 to 4 are 0.3333, 0.4445, 0.1481, and 0.0741. What is the difference in cash flow at inception (Buying Cash flow compared to Leasing Cash flow) - ignore cash inflow of any external debt on the buy-side? a. Buying cash out flow $59,200 higher than leasing cash flow b. Buying cash out flow $71,000 higher than leasing cash flow c. Buying cash out flow $79,200 higher than leasing cash flow d. Buying cash out flow $74,000 higher than leasing cash flow
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