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 $8,050,000, and it would be depreciated straight-line to zero over five years. Because of radiation contamination, it will actually be completely valueless in five years. You can lease it for $2,350,000 per year for five years. Assume that the tax rate is 35 percent. You can borrow at 15 percent before taxes.

What is the NAL? Should you lease or buy?

Explanation / Answer

Solution:

If the machine is purchased -

If the machine is leased -

Its better to lease the machine as, the cost on case of lease is less.

Year 1 to 5 Depreciation expense - $ 8,050,000 / 5 years          1,610,000 Add: Interest expense - Loan - $ 8,050,000 * 15 %          1,207,500 Total cost          2,817,500 Less: Tax saving - 35 %        986,125.00 Total cost after tax    1,831,375.00

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