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 $4,900,000 and 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 $1,840,000 per year for three years. Assume the tax rate is 25 percent. The borrowing rate is 7 percent before taxes. Your company does not expect to pay taxes for the next several years, but the leasing company will pay taxes. Over what range of lease payments will the lease be profitable for both parties? (Enter your answers from lowest to highest. Do not round intermediate calculations and round your answers to 2 decimal places, e.g., 32.16.)

Total Payment Range:

Answer 1

sol

After tax Cost = 7% (1-0.25) = 5.25%
Annual depreciation = 4900000*1/3	1633333
Tax shield n dep @25%		408333.3
Multiply: Annuity PVF at 5.25%		2.71054
Present value of Tax shield		1106804
Initiall investment in Scanner		-4900000
Net Present value of outflows		-3793196
Divide: Annuity PVF at 5.25% for 3yrs	2.71054
Equivalent Annual cost		-1399425
Annual lease payment		1399425

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