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 $5,700,000 and would be depreciated straight-line to zero over five years. Because of radiation contamination, it will actually be completely valueless in five years. You can lease it for $1,320,000 per year for five years. Assume a 23 percent tax bracket. You can borrow at 6 percent before taxes. What is the NAL of the lease from the lessor's viewpoint? (A negative answer should be indicated by a minus sign. Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.

Answer 1

Step - 1:

Borrowing rate = 6%

after tax rate = 6%*(1-tax)

= 6%*(1-23%)

= 4.62%

Step -2:

Depreciation = 5,7000,000 / 5 = 1,140,000

Depreciation tax shield = 1,140,000*23% = 262,200

Step - 3:

Annual lease payments = 1,320,000

After tax lease payments = 1,320,000*(1-0.23) = 1,016,400

Step - 4:

Total cash flow = 262,200 + 1,016,000 = 1,278,600

present value of total cash flow using discount rate of 4.62% is = 1,278,000*PVIFA(n =5 ; r = 4.62%)

= 5,594,303.91

Step - 5:

NAL of the lease(from lessor's pont) =Present value of total cash flows - purchase cost

= 5,594,303.91 - 5,700,000

= -$105,696.09