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 $7,810,000, 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 $2,125,000 per year for five years. Assume that the tax rate is 35 percent. You can borrow at 12 percent before taxes.

Calculate the NAL. (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

NAL $______

Explanation / Answer

Lease

Annual payments = 2125000*(1-35%) = -1381250

PV = -1381250*PV(12%*(1-35%),5,-1) = -1381250*4.01 = -5544124.03

Buy

Assuming company borrowed funds at 12% to buy the equipment.

Annual payment = - Interest payment + tax shield

                         = - (12%*7810000) + (12%*7810000 + 7810000/5)*35% = -62480

Principal repaid at 5th year

NPV = -62480*PV(12%*(1-35%),5,-1) - 7810000*PV(12%*(1-35%),5, ,-1)

NPV = -62480*4.01 - 7810000*0.69

       = -5615631

NAL = NPV of lease - NPV of buy = (-5544124.03) - (-5615631) = 71506.66

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