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 $7,430,000, 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 $2,175,000 per year for four years. Assume that the tax rate is 35 percent. You can borrow at 13 percent before taxes.

What is the NAL of the lease? (Do not round intermediate calculations and round your answer 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 $7,430,000, 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 $2,175,000 per year for four years. Assume that the tax rate is 35 percent. You can borrow at 13 percent before taxes.

Explanation / Answer

First we can find ou the depreciation tax shield

depreciation tax shield = (scanner cost / Number of depreciation years) * tax rate

= (7,430,000/4) * 0.35

= 650125

After tax lease payment = (lease payment) * (1-T)

T = tax rate

After tax lease payment = 2,175,000 * (1-0.35)

= 1413750

total cash flow by leasing is

= 1413750 + 650125

= 2063875

after tax cost of capital

= 0.13(1-0.35)

= 0.0845

= 8.45%
now calculate the NAL

Befor that we need to find the present value of the total cash flow

2063875 for 4 years at 8.45%

in the financial calculator

input CF0 = 0 enter down arrow

CF1 = 2063875 enter down arrow

F01 = 4 enter down arrow

press NPV

input I=8.45 enter down arrow

press CPT

we get NPV as 6767900.2

NAL = 7,430,000 - 6,767,900.2

= 662,100

NAL is positive hence we should lease it

Related Questions

Navigate

• Browse (All)
• Browse Y
• Subjects

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