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 $7,210,000, and it would be depreciated straight-line to zero over five years. Because of radiation contamination, it will actually be completely valueless in five years. You can lease it for $1,975,000 per year for five years. Assume that the tax rate is 35 percent. You can borrow at 12 percent before taxes. |
Calculate the NAL. (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) |
NAL | $ |
Should you lease or buy? | ||||
|
Depreciation tax shield = ( 7210000/5 ) * 35% | 504700 |
Lease payment ( after tax ) = 1975000*(1-35%) | 1283750 |
Total cash flow from leasing = 504700 + 1283750 | 1788450 |
After tax cost of debt = 12%*(1-35%) | 7.80% |
Net advantage of leasing (NAL) = 7210000 - (1788450*PVAF,7.80%) = 7210000 - (1788450*(1-(1+7.80%)^-5)/7.80%) | 31438.10 |
Should you lease or buy ? |
Answer : Lease |
Reason : As the NAL is positive we should lease |
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