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 $3,000,000 and it would be depreciated straight-line to zero over 4 years. Because of radiation contamination, it will actually be completely valueless in 4 years. You can lease it for $900,000 per year for 4 years. Assume the tax rate is 31 percent. You can borrow at 9 percent before taxes. What is the net advantage to leasing (NAL) from your company's standpoint? (Do not round your intermediate calculations.)

rev: 09_22_2012

$59,533.45

$234,899.08

$-56,698.52

$53,863.6

$56,698.52

Answer 1

Solution :

The net advantage to leasing (NAL) from the company's standpoint = $ 56,698.52

Thus the solution is option 5 = $ 56,698.52

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 = 9 % ; Tax rate = 31 % = 0.31

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

= 9 % * ( 1 - 0.31 ) = 9 % * 0.69 = 6.21 %

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