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 $7,900,000. 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. You can borrow at 6 percent before taxes. Assume that the scanner will be depreciated as three-year property under MACRS.

Calculate the NAL. (Negative amount should be indicated by a minus sign. Do not round intermediate calculations and round your final answer to 2 decimal places. (e.g., 32.16))

Explanation / Answer

Cost of scanner 7900000 Annual Lease amount 2275000 Period 4 years Tax rate 35% Pretax borrowing rate 6% Depreciation 3 years MACRS year 1 2 3 4 Depreciation rates 33.33% 44.45% 14.81% 7.41% Depreciation amount 2633070.00 3511550.00 1169990.00 585390.00 Tax Shield on Depn 921574.50 1229042.50 409496.50 204886.50 Salvage value 0 Cash flows associated with Lease Year 1 2 3 4 Lease amount 2275000 2275000 2275000 2275000 Discount rate = 6% Discount factor = 1/1.06^n 0.9433962 0.88999644 0.839619283 0.792093663 Present Value of Lease payment 2146226.4 2024741.901 1910133.869 1802013.084 Present Value of Lease Payments =sum(present value of annual lease payments)   = 7883115 Cash flows associated with purchase Year 0 1 2 3 4 Initial Investment -7900000 Tax shield on Depreciation 921574.50 1229042.50 409496.50 204886.50 Total Cash flows -7900000 921574.5 1229042.5 409496.5 204886.5 Discount factor at 6% 1 0.943396226 0.88999644 0.839619283 0.792094 Discounted flows -7900000 869409.9057 1093843.45 343821.1577 162289.3 Net Present Value -5430636.2 Net Advantage of Leasing = Present Value of Lease Payments - Net Present Value of purchase Net Advantage of Leasing =7883115 - (-5430636.2) = 13313751.46

Related Questions

Navigate

• Browse (All)
• Browse Y
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.