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 $6,300,000 and would be depreciated straight-line to zero over six years. Because of radiation contamination, it will actually be completely valueless in six years. You can lease it for $1,260,000 per year for six years.

Assume a 24 percent tax bracket. You can borrow at 6 percent before taxes. What is the NAL of the lease from the lessor's viewpoint? (A negative answer should be indicated by a minus sign. Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

Answer 1

Solution : -

After tax Cost = 6% * ( 1 - 0.24 ) = 4.56%

In Case of Purchase =

Depreciation Every Year = $6,300,000 / 6 = $1,050,000

Now Depreciation tax shield every year = $1,050,000 * 24% = $252,000

In case of Lease Payment After tax Lease Payment = $1,260,000 * ( 1 - 0.24 ) = $957,600

Net Present Cost in case of Purchase

= - $6,300,000 + ( $252,000 ) * PVAF ( 4.56% , 6 )

= - $6,300,000 + ( $252,000 * 5.1479 )

= - $5,002,728.67

Net Present Cost in case of Lease

= - $957,600 * PVAF ( 4.56% , 6 )

= - $957,600 * 5.1479

= - $4,929,631.06

Now Net advantage to Lease (NAL)

= $5,002,728.67 - $4,929,631.06

= $73,097.61

If there is any doubt please ask in comments

Thank you please rate