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:
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
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