Question

1A. 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 $4,800,000, 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 $1,430,000 per year for four years. Assume that the tax rate is 21 percent. You can borrow at 8 percent before taxes. Calculate the net advantage to leasing (NAL).


B. Refer to information in question 1. If the tax rate is 40 what is the net advantage to leasing?

Answer 1

1-A]	NPV - LEASING:
	After tax lease payment = 1430000*(1-21%) =	$           1,129,700
	Discount rate = 8%*(1-21%) =	6.32%
	NPV of leasing = -1129700*(1.0632^4-1)/(0.0632*1.0632^4) =	$        (3,886,016)
	NPV - BUYING:
	Cost of the equipment	$        (4,800,000)
	PV of depreciation tax shield = 1200000*21%*(1.0632^4-1)/(0.0632*1.0632^4) =	$              866,846
	NPV of buying	$        (3,933,154)
	NAL OF LEASING = -3886016-(-3933154) =	$                 47,138
B]	NPV - LEASING:
	After tax lease payment = 1430000*(1-40%) =	$              858,000
	Discount rate = 8%*(1-40%) =	4.80%
	NPV of leasing = -858000*(1.048^4-1)/(0.048*1.048^4) =	$ (3,056,613)
	NPV - BUYING:
	Cost of the equipment	$ (4,800,000)
	PV of depreciation tax shield = 1200000*40%*(1.048^4-1)/(0.048*1.048^4) =	$ 1,709,994
	NPV of buying	$        (3,090,006)
	NAL OF LEASING = -3886016-(-3933154) =	$                 33,393