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 $6,100,000, and it would be depreciated straight-line to zero over four years. Because of radiation contamination, it actually will be completely valueless in four years. You can lease it for $1,780,000 per year for four years. Assume that the tax rate is 23 percent.

  

Suppose the entire $6,100,000 purchase price of the scanner is borrowed. The rate on the loan is 7 percent, and the loan will be repaid in equal annual installments.

  

Calculate the amount of annual loan repayment. (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

Complete the schedules given below and calculate the NAL. (Do not round intermediate calculations and round your answers to 2 decimal places, e.g., 32.16. A negative answer should be indicated by a minus sign.)

This is the last question in the assignment. To submit, use Alt + S. To access other questions, proceed to the question map button.Next Visit question map

Question11of11Total11 of 11

Prev

Answer 1

Amount of annual loan repayment:

= [P × r × (1 + r)^n] /[(1 + r)^n - 1]

= [6100000 * 7% * (1 + 0.07)^4] / [(1 + 0.07)^4 - 1]

= 1800891.51

Annual depreciation = $6100000 / 4 years = $1525000

Annual tax savings on depreciation = $1525000 * 23% = $350750

After tax lease payment = (1780000) *(1 – 0.23) = $1370600

Annual operating cash flows = Annual after tax lease payments + Annual tax savings on depreciation = $1370600 + $350750 = $1721350

After tax cost of debt = 7%*(1 – 0.23) = 5.39%

NAL = 6100000 - (1721350*((1-(1.0539^(-4)))/0.0539)) = 51071.61