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 $7,280,000, 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 the tax rate is 35 percent.

  

Suppose the entire $7,280,000 purchase price of the scanner is borrowed. The rate on the loan is 8 percent, and the loan will be repaid in equal installments.

  

Calculate the amount of annual loan repayment. (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

  

Payment

$

  

Complete the schedules given below and calculate the NAL. (A negative answer should be indicated by a minus sign. Leave no cells blank - be certain to enter "0" wherever required. Do not round intermediate calculations and round your answers to 2 decimal places, e.g., 32.16.)

   

Amortization
	Beginning	Total	Interest	Principal	Ending
Year	Balance	Payment	Payment	Payment	Balance
1	$	$	$	$	$
2
3
4

    

Cash flows
	Aftertax			Total
Year	Loan Payment	OCF		Cash Flow
1	$	?$	=	$
2		?	=
3		?	=
4		?	=

        

NAL

$

Answer 1

Loan amount = 7,280,000

Interest = 8%

Payments = Loan*Interest/(1-(1+Interest)^-Time)

= 7,280,000*8%/(1-(1+8%)^-4) = 2,197,983.46

Interest = Beginning Balance*8%

Principal repayment = Payment-Interest

Ending balance = Beginning Balance - Principal Repayment

Depreciation = 7,280,000/4 = 1820000

OCF = Depreciation tax shield + Aftertax lease payment

= 1820000*35% + 2,175,000*(1-35%) = 2050750

Aftertax payment = Pretax payment – Interest tax shield

Interest tax shield = Interest*35%

After tax debt cost = 8%*(1-35%) = 5.20%

NAL = -56606.54/(1+5.2%)^1-11370.21/(1+5.2%)^2+37485.04/(1+5.2%)^3+90248.70/(1+5.2%)^4 = 41799.03