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 the tax rate is 24 percent. The borrowing rate is 6 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?

Answer 1

Answer:

Cost of Scanner	6300000
Life (in years)	6
Present Value annuity factor 6% for 6 years	4.9173
Cost per annum	6300000/4.9173
	1281190.897
Depreciation	1050000
Tax rate	24%
Depreciation Tax Shield	252000
Borrowing Rate	6%
After tax rate	4.56%
Present Value annuity factor 4.56% for 6 years	5.1479
Present Value of tax savings (252000* 5.1479)	1297270.8
Net cost to lessor	6300000-1297270.80
	5002729.2
Lease payment per annum after tax	5002729/5.1479
	971800.00
Lease payment per annum before tax	971800/0.76
	1278684.21

Range of lease payments that will be profitable fo both the parties: $1,278,684.21 to $1,281,190.897