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In: Finance

Use the following information to work Problems (1) through (4): You work for a lab that...

  1. Use the following information to work Problems (1) through (4):

You work for a lab that is considering leasing diagnostic equipment. The cost of the equipment is $6,300,000, and it would be depreciated straight-line to zero over four years. The equipment will be completely valueless in four years. You can lease it for $1,875,000 per year for four years.

  1. Assume that the tax rate is 35 percent. You can borrow at 8 percent before taxes. Should you lease or buy?
  2. What would the lease payment have to be for you to be indifferent about the lease?   
  3. Assume that your company does not anticipate paying taxes for the next several years (you can not use the tax shield from leasing payment or asset depreciation; the cost of debt is the same as pretax cost). What are the cash flows from leasing in this case? Should you lease or buy?
  4. Rework Problem 1 assuming that the scanner will be depreciated as three-year property under MACRS.

Year

1

2

3

4

MACRS Percentage

33.33%

44.45%

14.81%

7.41%

Solutions

Expert Solution

jeff jeffy answered 3 months ago
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