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 $5,300,000 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 $1,585,000 per year for four years. Assume that the tax rate is 24 percent. You can borrow at 8 percent before taxes. Calculate the NAL. (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) Answer is complete but not entirely correct. NAL $ 64,983.62 Should you lease or buy? Buy Lease

Answer 1

Given,

Cost of scanner = $ 5300000

Life of scanner (n) = 4 years

Lease payment = $ 1580000

Tax rate = 24% or 0.24

Cost of debt = 8% or 0.08

Solution :-

Depreciation tax shield Cost of Scanner X Life of Scanner Tax rate $5300000 x 24% 4 - $1325000 x 24% = $ 318000 After tax lease payment = Lease payment (1- etax rate) = $1580000 (1 - 0.74). = $1580000 (0.76) = $1200800 Operating Cash Flows (OCF) - Depreciation tax & After tax lease paded Shield payment = $318000 + $ 200800 » a $ 1518800

After tax cost of debt (8) - Cost of deat (1 tax rate) - 8%. (1-0.24) = 8% (0.76) = 6.08% of 0.0608 Now, NAL = Cost of Scanner – PV of annual OCF = $53000 - ocell 100 = $530000 - heures 0 +6.0605") - $5300000 - 1518800 0.0608 ; = $5300000 - 1518800), 0.0608 629753 = $5300000 - | 1518800 x 0.26629253 10.0608 1.266292531

- $5300000 - $5253175.96 = $46824.04 positive, you Since, Should the NAL is lease.