connect FINANCE apter 21 Problems Question 2 (of 3) value: 8.33 points · You wor
ID: 2795208 • Letter: C
Question
connect FINANCE apter 21 Problems Question 2 (of 3) value: 8.33 points · You work for a nuclear research laboratory that is contemplating leasing a diagnostio scanner (leasing is a common practice with expensive, high-tech equipment). The scanner costs $5,700,000, 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. Assume that the tax rate is 35 percent. You can borrow at 15 percent before taxes What would the lease payment have to be for both the lessor and the lessee to be indifferent about the lease? (Enter your answer in dollars, not millions of dollars, o.g., 1,234,567. Do not round intermediate calculations and round your answer to 2 decimal places, e.g, 32.16) Hints References eBook & Resources Hint#1 Check my work esc 20 F2 ESExplanation / Answer
Cost of Scanner = $5,700,000
Period of Lease = 3 years
Cost of Capital = 15%
Tax rate = 35%
After-tax Cost of Capital = Cost of Capital * (1 - Tax rate)
After-tax Cost of Capital = 15% * (1 - 0.35)
After-tax Cost of Capital = 9.75%
Net Advantage to Leasing, NAL = -Cost of Scanner + Present Value of OCF
0 = -$5,700,000 + OCF * PVIFA (9.75%, 3)
0 = -$5,700,000 + OCF * (1 - (1 / 1.0975)^3) / 0.0975
$5,700,000 = OCF * 2.49784
OCF = $2,281,971.62
Annual Depreciation = Cost of Scanner / Period of Lease
Annual Depreciation = $5,700,000 / 3
Annual Depreciation = $1,900,000
Depreciation Tax Shield = Annual Depreciation * tax rate
Depreciation Tax Shield = $1,900,000 * 0.35
Depreciation Tax Shield = $665,000
After-tax Lease Payment = OCF - Depreciation Tax Shield
After-tax Lease Payment = $2,281,971.62 - $665,000
After-tax Lease Payment = $1,616,971.62
Break-even Lease Payment = After-tax Lease Payment / (1 - tax rate)
Break-even Lease Payment = $1,616,971.62 / (1 - 0.35)
Break-even Lease Payment = $2,487,648.65
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