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