· LEASE VERSUS BUY 30% Use the following information to work Problems 1-6. You w
ID: 2792015 • Letter: #
Question
· LEASE VERSUS BUY 30% Use the following information to work Problems 1-6. 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 $4,500,000, 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 $1,350,000 per year for four years. 1. Lease or Buy Assume that the tax rate is 35 percent. You can borrow at 8 percent before taxes. Should you lease or buy? 2. Leasing Cash Flows What are the cash flows from the lease from the lessor's viewpoint? Assume a 35 percent tax bracket. 3. Finding the Break-Even Payment What would the lease payment have to be for both the lessor and the lessee to be indifferent about the lease?Explanation / Answer
Annual cash flows of purchasing have two components: the loan amount to be repaid in each period and the tax shields associated with it and depreciation expense and interest expense. The following table summarizes the calculation of cash flows under this alternative
Since leasing($3097169)has less cash out flow than purchasing ($3110244) So Leasing wil be preferred over purchasing
Option: Purchasing Cost of Diagnostic Scanner Equipment 4,500,000 Life of the equipment 4 years Depreciation 1125000 tax rate 0.35 Loan repayment amount per year (it can be otained by pmt function of excel) and it will give the repayment amount for a given loan amount, time period and at an interest rate $1,358,643.62 interest rate before taxes 8%Related Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.