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 proactive with expensive, high-tech equipment). The scanner costs $7,900,000. Because of radiation contamination, it will actually be completely valueless in four years. You can lease it for $2,75,000 per year for four years. Assume that the tax rate is 35 percent. you can borrow at 6 percent before taxes. Assume that the scanner will be depreciated as three-year property under MACRS. Should you lease or buy? Leased Buy

Explanation / Answer

Option I Purchase Year Purchase cost Depreciation Tax saving on depreciation PVAF@6% PV 0 7900000 1 7900000 1 2633070 921575 0.9434 869413.4 2 2341150 819403 0.891 730087.7 3 433308 151658 0.8396 127331.9 4 184692 64642 0.7921 51203.13 Net Cost of purchase 6121964 Option II Lease Year Lease rental(net of tax saving) PVAF@6% PV of lease rentals 0 1 1 1478750 0.9434 1395053 2 1478750 0.891 1317566 3 1478750 0.8396 1241559 4 1478750 0.7921 1171318 Net Lease Rental 5125495 NAL 996468 Decesion should be = Leased

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