You work for a nuclear research laboratory that is contemplating leasing a diagn

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 $2,100,000 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 $630,000 per year for 4 years. Assume the tax rate is 33 percent. You can borrow at 8 percent before taxes. The net advantage to leasing (NAL) from your company's standpoint is $___________.   

Explanation / Answer

Net advantage to leasing is defined as the net present value of entering into a lease instead of borrowing money to buy the asset. If the net advantage to leasing is a positive value, it suggests that a company should enter into a lease instead of buying.

1. Loan Alternative

2. Lease Alternative

Cost of Assets $2,100,000.00 Interest P.a. $168,000.00 Tax Saving $55,440.00 Net Intt. Cost P.a. $112,560.00 Depreciation P.a. $525,000.00 Tax Saving on Dep. $173,250.00

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