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 very common practice with expensive, high-tech equipment). The scanner costs $7,890,000, 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 $2,375,000 per year for four years. Assume that the tax rate is 35 percent. Suppose the entire $7,890,000 purchase price of the scanner is borrowed. The rate on the loan is 8 percent, and the loan will be repaid in equal annual installments Calculate the amount of annual loan repayment. (Round your answer to 2 decimal places. (e.g., 32.16)) Payment Complete the schedules given below and calculate the NAL. (Negative amounts should be indicated by a minus sign. Round your answers to 2 decimal places. (e.g., 32.16) Amortization Beginning Balance Total Payment Interest Payment Principal Payment Ending Balance Year 2 4 Cash flows Aftertax Loan Payment Total Cash Flow Year OCF 2 4 NAL

Explanation / Answer

Part A

We have:

PV= 7,890,000

N = 4

R= 8%

We can calculate annual payment using the following formula:

Part B)

Amortization table:

Year

Begin balance

Total payment

Interest payment

Principal payment

Ending balance

1

7,890,000.00

2,382,155.15

631,200.00

1,750,955.15

6,139,044.85

2

6,139,044.85

2,382,155.15

491,123.59

1,891,031.56

4,248,013.29

3

4,248,013.29

2,382,155.15

339,841.06

2,042,314.08

2,205,699.21

4

2,205,699.21

2,382,155.15

176,455.94

2,205,699.21

0.00

Part C)

Annual depreciation = 7,890,000/4

                                         = 1972500

Depreciation tax benefit = 1972500 x35%

                                                = 690375

OCF = amount of lease x (1-t) + depreciation tax benefit

         = 2375000 x (1-0.35) + 690,375

         = 2,234,125

Year

Aftre tax loan payment

OCF

Total cash flow

1

2161235.147

2234125

-72889.85286

2

2210261.891

2234125

-23863.10874

3

2263210.775

2234125

29085.77491

4

2320395.569

2234125

86270.56925

NAL

18603.38257

Year

Begin balance

Total payment

Interest payment

Principal payment

Ending balance

1

7,890,000.00

2,382,155.15

631,200.00

1,750,955.15

6,139,044.85

2

6,139,044.85

2,382,155.15

491,123.59

1,891,031.56

4,248,013.29

3

4,248,013.29

2,382,155.15

339,841.06

2,042,314.08

2,205,699.21

4

2,205,699.21

2,382,155.15

176,455.94

2,205,699.21

0.00

Related Questions

Navigate

• Browse (All)
• Browse Y
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.