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 $4,500,000 and would be depreciated straight-line to zero over three years. Because a radiation contamination, it will actually be completely valueless in three years. You can lease it for $1,650, 000 per year for three years. Assume that the tax rate is 21 percent. You can borrow at 6 percent before taxes.

Calculate the NAL. (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

Answer 1

Solution:

The Net advantage of leasing ( NAL ) is = $ 70,861.70

Note :

The discount rate used in the solution is the after tax discount rate.

As per the information given in the question we have

Discount rate = 6 % ; Tax rate = 21 % = 0.21

Thus, after tax discount rate = Discount rate * ( 1 - Tax rate )

= 6 % * ( 1 - 0.21 ) = 6 % * 0.79 = 4.54%

Please find the attached screenshot of the excel sheet containing the detailed calculation for the above solution.

15.02.2020 - Microsoft Excel ? E FILE INSERT PAGE LAYOUT FORMULAS DATAREVIEW VIEW HOME в А Sl.No. Particulars Statement showing calculation of Net cash outflows of the Lease Option Amount Tax@ 21% After Tax Lease PVF @ 4.74% Discounted Cash (1) (2) = (1) * 0.21 payment outflows (3) = (1)-(2) (5) = (3) * (4) $ -1,650,000.00 $ -346,500.00 $ non -1,303,500.00 0.9547 $ -1,244,510.2158 $ -1,650,000.00 $ -346,500.00 $ -1,303,500.00 0.9115 $ -1,188,190.0093 $ -1,650,000.00 $ -346,500.00 $ -1,303,500.00 0.8703 $ -1,134,418.5692 Net cash outflows of the lease option $ -3,567,118.7943 1 Lease payment Year 1 2 Lease payment Year 2 3 Lease payment Year 3 PVF @ 4.74% (1) (5) Discounted Cash flows (6) = (4) * (5) Statement showing calculation of net cash outflows of the Purchase option Sl.No. Particulars Amount Depreciation Tax shield @ 21% Total of cash = $ 4500000/3 (3)=(2) *0.21 Flows = $ 1500000 (4) = (1) + (3) (2) 1 Cash Outflow - Initial Investment - Year 0 $ -4,500,000.00 $-4,500,000.00 2 Cash Inflow - Depreciation Tax Shield - Year 1 $ $ 1,500,000.00 $ 315,000.00 $ 315,000.00 3 Cash Inflow - Depreciation Tax Shield - Year 2 $ - $ 1,500,000.00 $ 315,000.00 $ 315,000.00 4 Cash Inflow - Depreciation Tax Shield - Year 3 $ $ 1,500,000.00 $ 315,000.00 $ 315,000.00 Net cash outflows of the purchase option - $ 1.0000 $ 0.9547 $ 0.9115 $ 0.8703 $ $ -4,500,000.0000 300,744.7012 287,134.5247 274,140.2756 -3,637,980.4985 Statement showing Net advantage of leasing Sl.No. Particulars Amount 1 Net cash outflows of the lease option $ -3,567,118.7943 2 Less:Net cash outflows of the purchase option $ -3,637,980.4985 3 Net advantage of the lease relative to the purchase = (1) - (2) 4 NAL(Rounded to two decimal places) $ 70,861.70