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 $6,000,000 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 $1,450,000 per year for five years.

  

The tax rate is 25 percent. You can borrow at 7 percent before taxes. What is the NAL of the lease from the lessor's viewpoint?

Answer 1

Post tax cost of debt	5.25%
Buying the equipment
Loan amount	6000000
Year	0	1	2	3	4	5
Interest Cost		420000	420000	420000	420000	420000
Depreciation		1200000	1200000	1200000	1200000	1200000
Total		1620000	1620000	1620000	1620000	1620000
Tax shield		405000	405000	405000	405000	405000
Post tax cost		1215000	1215000	1215000	1215000	1215000
Less: depreciation		1200000	1200000	1200000	1200000	1200000
Add: loan payback						6000000
Net Cash out flow		15000	15000	15000	15000	6015000
NPV @ 5.25%	$4,710,084.18
Lease Option
Year	0	1	2	3	4	5
Lease cost		1450000	1450000	1450000	1450000	1450000
Tax shield		362500	362500	362500	362500	362500
Post tax cost		1087500	1087500	1087500	1087500	1087500
Net Cash out flow		1087500	1087500	1087500	1087500	1087500
NPV @ 5.25%	$4,675,944.84
NAL	$34,139.35	This is	from lessee	standpoint
For Lessor, the sign is negative	-$34,139.35