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 $6,500,000 and it would be depreciated straight-line to zero over three years. Because of radiation contamination, it will actually be completely valueless in three years. You can lease it for $2,673,000 per year for three years.

Assume a 35 percent tax bracket. You can borrow at 12 percent before taxes. What is the NAL of the lease from the lessor's viewpoint? (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))

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 $6,500,000 and it would be depreciated straight-line to zero over three years. Because of radiation contamination, it will actually be completely valueless in three years. You can lease it for $2,673,000 per year for three years.

Explanation / Answer

We will calculate cash flows from the depreciation tax shield first.

The depreciation tax shield is = ($6,500,000/3)(.35) = $758,333.33

The aftertax cost of the lease payments = ($2,673,000)(1 – .35) = $1,737,450

So, the total cash flows from leasing = $ 758,333.33 + 1,737,450 = $2,495,783.33

The aftertax cost of debt is = .12(1 – .35) = .078

Using all of this information, we can calculate the NAL as:= $6,500,000 – $2,495,783.33(PVIFA7.8%,3) = $ 44,905.99

The NAL is positive so you should lease.

Related Questions

Navigate

• Browse (All)
• Browse Y
• Subjects

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