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 $6,500,000 and it would be depreciated straight-line to zero over four years. Because of radiation contamination, it actually will be completely valueless in four years. You can lease it for $1,910,000 per year for four years. The tax rate is 25 percent. You can borrow at 7 percent before taxes. What is the NAL of the lease from the lessor's viewpoint? (A negative answer should be indicated by a minus sign. Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

Answer 1

Solution :

The NAL of the lease from the lessor's viewpoint = $ 17,570.2465

= $ 17,570.25 ( when rounded off to two decimal places )

Since the NAL is positive, the radiator should be leased.

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 = 7 % ; Tax rate = 25 % = 0.25

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

= 7 % * ( 1 - 0.25 ) = 7 % * 0.75 = 5.25 %

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