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 $7,900,000. Because of radiation contamination, it will actually be completely valueless in four years. You can lease it for $2,275,000 per year for four years. Assume that the tax rate is 35 percent. You can borrow at 6 percent before taxes. Assume that the scanner will be depreciated as three-year property under MACRS. Calculate the NAL. (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)) NAL Should you lease or buy? Buy Leased

Explanation / Answer

The aftertax cost of the lease payments will be:

Aftertax lease payment = ($2,275,000)(1 – .35) = $1,478,750

The appropriate depreciation percentages for a 3-year MACRS class asset. The depreciation percentages are .3333, .4445, .1481, .

The cash flows from leasing are:

Year 1: ($7,900,000)(.3333)(.35) + $1,478,750 = $2,400,325

Year 2: ($7,900,000)(.4445)(.35) + $1,478,750= $2,707,793

Year 3: ($7,900,000)(.1481)(.35) + $1,478,750 = $1,888,247

NAL = $7,900,000 – $2,400,325/1.039 – $2,707,793/1.039^2 – $1,888,247/1.039^3

NAL =$1,397949

1.039 = 1+(1-.35)*.06

The machine should be Leased

The machine should be purchased.

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