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 $6,400,000, 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 $1,590,000 per year for five years. Assume that the tax rate is 24 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

Solution :

The NAL of the lease is = $ 29,611.73

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 = 8 % ; Tax rate = 24 % = 0.24

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

= 8 % * ( 1- 0.24 ) = 8 % * 0.76 = 6.08 %

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