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 $5.2 million and would be depreciated straight-line to zero over four years. Because of radiation contamination, it will actually be completely valueless in four years. Assume that the tax rate is 21 percent. You can borrow at 8 percent before taxes.

What would the lease payment have to be for both the lessor and the lessee to be indifferent about the lease? (Do not round intermediate calculations and enter your answer in dollars, not millions of dollars, rounded to 2 decimal places, e.g., 1,234,567.89.)

Answer 1

1]	The discount rate = 8*(1-21%) =	6.32%
2]	The NPV of the buying = -5200000+PV of depreciation tax shield+PV of after tax salvage value =
	=-5200000+(5200000/4)*21%*(1.0632^4-1)/(0.0632*1.0632^4)+0 =	$ (4,260,916.77)
3]	The NPV of leasing to the lessee should be
	equal to the NPV of buying.
	Therefore, annual after tax lease rent = 4260916.77*0.0632*1.0632^4/(1.0632^4-1) =	$    1,238,687.10
	Before tax lease rent = 1238687.10/(1-21%) =	$    1,567,958.35