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 $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? |

Answer #1

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 $

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