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 $7,300,000, 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 12 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))

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 $7,300,000, 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

Aftertax debt cost = 12%*(1 - 35%) = 7.8%

NAL = 0 = 7300000 – OCF*PV(7.8%,4, -1)

OCF = 7300000 / 3.33 = 2194218.12

Depreciation tax shield = (7300000 / 4)(35%) = 638750

Aftertax lease payment = 2194218.12 - 638750 = 1555468.12

Breakeven lease payment = 1555468.12 / (1 - 35%) = 2393027.88 (Lessor payment)

For the lessee , need to calculate breakeven lease with a Zero NAL

Total PV of lease = scanner cost

Lease payment * PV(12%,5, -1) = 7300000

Lease payment = 7300000 / 3.60 = 2025091.04

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