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 $7,610,000, 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 $2,275,000 per year for four years. Assume that the tax rate is 35 percent. Suppose the entire $7,610,000 purchase price of the scanner is borrowed. The rate on the loan is 8 percent, and the loan will be repaid in equal annual installments. Calculate the amount of annual loan repayment. (Round your answer to 2 decimal places. (e.g., 32.16)) Complete the schedules given below and calculate the NAL. (Negative amounts should be indicated by a minus sign. Round your answer to 2 decimal places. (e.g., 32.16))

Explanation / Answer

cost of debt 8% taxrate 35% rate 5.20% (1-taxrate)*cost of debt is discount rate Leasing n Lease Pay TaxSaved Net oCF 0 (A) (-A*35%) OCF1=A(1-35%) 1 -22,75,000 7,96,250 -14,78,750 2 -22,75,000 7,96,250 -14,78,750 3 -22,75,000 7,96,250 -14,78,750 4 -22,75,000 7,96,250 -14,78,750 Purchase Year Depreciation(d) EBIT(d) TaxSaving(TS) NetIncome NetCashFlow (n) (=-(7610000)/4) (-35%*(EBIT)) NI=EBIT+TS OCF2=NI+d 1 -1902500 -19,02,500 665875 -12,36,625 6,65,875 2 -1902500 -19,02,500 665875 -12,36,625 6,65,875 3 -1902500 -19,02,500 665875 -12,36,625 6,65,875 4 -1902500 -19,02,500 665875 -12,36,625 6,65,875 rate 5.20% Purchase Year Loan Payment OCF=OCF1-OCF2 Total PV (n) After tax(B) Cash Flow(CF=OCF-B) (CF/(1+rate)^n 1 -20,84,537 -21,44,625.00 -60,087.68 -57117.56474 2 -21,31,824 -21,44,625.00 -12,800.79 -11566.59151 3 -21,82,894 -21,44,625.00 38,269.04 32870.0511 4 -22,38,049 -21,44,625.00 93,424.47 76277.71279 NAL $ 40463.61 After tax Loan Payment=Principal+(1-taxrate)*Interest

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