very common practice with expensive, high-tech equipment). The scanner costs $7,

Question

very common practice with expensive, high-tech equipment). The scanner costs $7,300,000, and it would be depfeciated stra ie to ero vr four years. Because of radiation contamination, t will actualy be completely valueless in four years. Assume that the tax rate is 35 percent. You can borrow at 12 percent before taxes. What would the lease payment have to be for both lessor and lessee to be indifferent about the lease? (Do not round intermediate calculations and round your final answer to 2 decimal places. (e.g., 32.16)) Break-even lease payment

Explanation / Answer

When both the lesser and lessee would be indifferent about the lease the cost of leased asset will be equal to present value of cash outflow in lease.

Cost of Scanner = (Tax saving on Depreciation+Cash outflow for lease)*PVAF(7.8%,4 years)

Cost of scanner = $7,300,000

Tax saving on depreciation = ($7,300,000/4)*0.35 = $638,750

Cash outflow for lease after tax = (Lease payments)*(1-0.35)

PVAF(7.8%,4 years) = 3.327 (After tax cost of debt = 12%(1-0.35) = 7.8%)

$7,300,000 = [$638,750+(Lease payments*0.65)]*3.327

$7,300,000/3.327 = $638,750+(Lease payments*0.65)

$2,194,168.92 - $638,750 = Lease payments*0.65

Lease Payments before tax = 1,555,418.92/0.65 = $2,392,952

Break even lease payment = $2,392,952

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