Question

You work for a nuclear research laboratory that is contemplating leasing a diagnostic scanner (leasing is a very common practice with expensive, high-tech equipment). The scanner costs $3,000,000, and it would be depreciated straight-line to zero over 4 years. Because of radiation contamination, it will actually be completely valueless in 4 years. You can lease it for $1,050,000 per year for four years. Assume that your company does not anticipate paying taxes for the next several years. You can borrow at 6 percent before taxes. What is the NAL of this lease? (Do not round your intermediate calculations.)

rev: 09_22_2012

$750,000

$-606,442.85

$-670,278.94

$-638,360.89

$-809,594.19

Answer 1

Depreciation tax shield = ($3,000,000/4)(0) = $0

The after-tax cost of the lease payments will be:

After-tax lease payment = ($1,050,000)(1 – 0) = $1,050,000

So, the total cash flows from leasing are:

OCF = $0 + $1,050,000 = $1,050,000

After-tax kD = 6%

NAL = PV of Cash Inflows - PV of Cash Outflows

= $3,000,000 - [($1,050,000/0.06) x {1 - (1.06)^-4}]

= $3,000,000 - [$17,500,000 x 0.2079] = $3,000,000 - 3,638,360.89 = -$638,360.89

Hence, Option "D" is correct.