Question

You work for a nuclear research laboratory that is contemplating leasing a diagnostic scanner (leasing is a very common practice with expensive, high-tech equipment). The scanner costs $4,500,000 and it would be depreciated straight-line to zero over three years. Because of radiation contamination, it will actually be completely valueless in three years. You can lease it for $1,925,000 per year for three years. Assume a 35 percent tax bracket. You can borrow at 14 percent before taxes.

What is the NAL of the lease from the lessor's viewpoint? (Negative amount should be indicated by a minus sign. Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

NAL $

Answer 1

Statement showing PW under buying option

Particulars	0	1	2	3	Total
Cost price of machine	-4500000
Depreciation		1500000	1500000	1500000
Tax savings @35%		525000	525000	525000
Total cash flow	-4500000	525000	525000	525000
PVIF @ 9.1%	1	0.9166	0.8401	0.7701
Present value	-4500000	481209.9	441072.3	404282.6	-3173435.18

Statement showing PW under lease option

Particulars	1	2	3	Total
Lease	-1925000	-1925000	-1925000
Tax savings @35%	673750	673750	673750
Total cash flow	-1251250	-1251250	-1251250
PVIF @ 9.1%	0.9166	0.8401	0.7701
Present value	-1146883.6	-1051222.4	-963540.2	-3161646.15

Thus NAL = 3173435.18 - 3161646.15

=11789.03$