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 $6,100,000 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 that the tax rate is 22 percent. You can borrow at 7 percent before taxes.

  

Calculate the NAL.

Answer 1

Depreciation per year = 6100000/6	1016667
Annual operating cash flow = Depreciation per year * Tax% + Annual lease payment *(1-tax%) = 1016667*22% + 1260000*(1-22%)	1206466.74
After tax cost of debt = Before tax cost of debt * (1-tax%) = 7%*(1-22%)	5.46%
Present value of Annual operating cash flow = 1206466.74*(1-(1+5.46%)^-6)/5.46%	6034590.35
NAL = Cost of scanner - Present value of Annual operating cash flow = 6100000 - 6034590.35	65409.65