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 $5,200,000 and would be depreciated straight-line to zero over four years. Because of radiation contamination, it will actually be completely valueless in four years. You can lease it for $1,460,000 per year for four years. Assume that the tax rate is 23 percent. You can borrow at 7 percent before taxes. Calculate the NAL. (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) Should you lease or buy?

Answer #1

After tax cost of capital = 7% (1-0.23) = 5.39% | ||||||

Annual Depreciation (5200000/4) | 1300000 | |||||

Tax shield on dep (1300000*23%) | 299000 | |||||

Multiply: Annuity PVF at 5.39% for 4yrs | 3.51406 | |||||

Inflows of Tax shield on dep | 1050704 | |||||

Initial investment | -5200000 | |||||

Net Present value of outflows | -4149296 | |||||

Annual lease payment | -1460000 | |||||

Less: Tax benefit @23% | 335800 | |||||

Net Annual lease payment | -1124200 | |||||

Multiply: Annuity PVF at 5.39% for 4yrs | 3.51406 | |||||

Present value f lease payment | -3950506 | |||||

NAL | 198790 | |||||

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