Question

You work for a nuclear research laboratory that is contemplating leasing a diagnostic scanner (leasing is...

 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 \$4,900,000 and 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 \$1,840,000 per year for three years.

 Assume that your company does not contemplate paying taxes for the next several years. You can borrow at 7 percent before taxes. What is the NAL of the lease?

Here discount rate is 7%

Now since there is no tax , tax shield will not be available for depreciation, hence present value of buying option is equal to purchase price of equipment i.e \$4900,000

Statement showing PV of leasing option

 Year Lease expense PVIF @ 7% PV 1 1840000 0.9346 1719626.17 2 1840000 0.8734 1607127.26 3 1840000 0.8163 1501988.09 PV of lease 4828741.52

Thus PV of lease option = \$4828741.52

Thus NPV = PV of buying option- PV of lease option

= 4900000-4828741.52

= 71258.48 \$