You work for a nuclear research laboratory that is contemplating leasing a diagn

Question

You work for a nuclear research laboratory that is contemplating leasing a diagnostic scanner (leasing is a common practice with expensive, high-tech equipment). The scanner costs S5,200,000, and it would be depreciated straight-line to zero over four years. Because of radiation contamination, it will actually be completely valueless in four years. You can lease it for $1,525,000 per year for four years. Assume a 35 percent tax bracket. You can borrow at 8 percent before taxes. What is the NAL of the lease from the lessor's viewpoint? (Negative amount should be indicated by a minus sign. Do not round intermediate calculations and round your final answer to 2 decimal places, (e.g., 32.16))

Explanation / Answer

Hi,

Please find the detailed answer as follows:

Initial Investment = -5200000

Annual Depreciation = Cost/Useful Life = 5200000/4 = 1300000

After Tax Cost = 8*(1-.35) = 5.2%

Annual Cash Inflow = (Lease Value - Depreciation)*(1-Tax Rate) + Depreciation = (1525000 - 1300000)*(1-.35) + 1300000 = 1446250

NAL = -5200000 + 1446250/(1+.052)^1 + 1446250/(1+.052)^2 + 1446250/(1+.052)^3 + 1446250/(1+.052)^4 = -95405.02

Answer is -95405.02

Thanks.

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