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 $5,100,000, and it would be depreciated straight-line to zero over five years. Because of radiation contamination, it actually will be completely valueless in five years. You can lease it for $1,270,000 per year for five years. Assume that the tax rate is 21 percent. You can borrow at 8 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.)

Answer 1

Answer :

Here, we have that,

Annual depreciation = $5,100,000 / 5 years = $1,020,000

Annual tax savings on depreciation = $1,020,000 * 21% = $214,200

After tax lease payment = $1,270,000 * ( 1 - 0.21 ) = $1,003,300

Now,

Annual operating cash flows = Annual after tax lease payments + Annual tax savings on depreciation

= $1,003,300 + $214,200

= $1,217,500

After tax cost of debt = 8% * ( 1 - 0.21 ) = 6.32%

Then, we have,

Present value of annuity = Annuity amount * [ 1 - ( 1 + r )^-n ] / r

= $1,217,500 * [ 1 - ( 1 + 0.0632 )^-5 ] / 0.0632

= $5,084,213.70

Therefore,

Net advantage to leasing ( NAL ) = Cost of scanner - Present value of annuity

= $5,100,000 - $5,084,213.70

Net advantage to leasing ( NAL ) = $15,786.30