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 $5,200,000 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 $1,220,000 per year for five years. The tax rate is 22 percent. You can borrow at 6 percent before taxes. What is the NAL of the lease from the lessor's viewpoint? (A negative answer should be indicated by a minus sign. Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

NAL:

Answer 1

Answer:

778713.42

Explanation:

Step 1: Calculation of lessee's NAL

We will calculate cash flows from the depreciation tax shield first.

The depreciation tax shield is: Depreciation tax shield = ($5,200,000/4) (.22) = $286,000

The after-tax cost of the lease payments will be: After-tax lease payment = ($1,220,000)(1 – .22) = $951,600

So, the total cash flows from leasing are:

OCF = $286,000 + 951,600 = $1,237,600

The after-tax cost of debt is:

After-tax debt cost = .06(1 – .22) = .468

Using all of this information, we can calculate the NAL as:

NAL = $5,200,000 – $1,237,600 (PVIFA 4.68%,4)

NAL = $778713.42

Step 2: Calculation of the NAL of the lessor:

If we assume the lessor has the same cost of debt and the same tax rate, the NAL to the lessor is the positive of our company’s NAL,

so: NAL = $778,713.42