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 $6,900,000, 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.

Assume the tax rate is 35 percent. The borrowing rate is 10 percent before taxes. Your company does not expect to pay taxes for the next several years, but the leasing company will pay taxes. Over what range of lease payments will the lease be profitable for both parties? (Enter your answers from lowest to highest. Do not round intermediate calculations and round your final answers to 2 decimal places. (e.g., 32.16))

Total payment range $ ? to $ ?

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 $6,900,000, 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.

Explanation / Answer

We should analyse the after tax lease rental for understanding the lease is beneficial or not. The lease will be treated as a finance lease, so the lessee will be climing the depriciation for tax purpose

After Tax saving that the lessee is making

Depriciation = 6900000/4 = 1725000

After tax saving @ 35% = 1725000 * (1-0.35) = 11,21,250

Pv of savings = 1121250 PVIFA( 10%,4) = 3554211.63

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