Question

You work for a nuclear research laboratory that is contemplating leasing a diagnostic scanner (leasing is a common practice with expensive, high-tech equipment). The scanner costs $5,100,000 and 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 $1,450,000 per year for four years. Assume that the tax rate is 22 percent. You can borrow at 6 percent before taxes.

  

Calculate the NAL. (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

NAL =

Answer 1

Solution :

The Net advantage of Leasing (NAL) is = $ 57,461.20

= $ 57,461 ( when rounded off to the nearest whole number )

Note :

The discount rate used in the solution is the after tax discount rate.

As per the information given in the question we have

Discount rate = 6 % ; Tax rate = 22 % = 0.22

Thus, after tax discount rate = Discount rate * ( 1 - Tax rate )

= 6 % * ( 1- 0.22 ) = 6 % * 0.78 = 4.68 %

Please find the attached screenshot of the excel sheet containing the detailed calculation for the above solution.