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 common practice with expensive, high-tech equipment). The scanner costs $5,000,000, and it 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 $1,750,000 per year for four years. Assume that the tax rate is 30 percent. You can borrow at 8 percent before taxes. Required: (a) Calculate the NAL- $ (b) Would you buy or lease?

Explanation / Answer

Scanner cost=$5000,000, SV4=0 Lease payment=$1,750,000/yr. d=50%, T=30%, and r=8% the after tax cost of debt is 8(1-0.30) = 5.6 %

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