Question

You work for a nuclear research laboratory that is contemplating leasing a diagnostic scanner (leasing is a common practice with expensive, high-tech equipment). The scanner costs $5,900,000 and would be depreciated straight-line to zero over five years. Because of radiation contamination, it will actually be completely valueless in five years. You can lease it for $1,450,000 per year for five years. Assume that the tax rate is 25 percent. You can borrow at 8 percent before taxes. Calculate the NAL. (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) Should you lease or buy? Lease or Buy?

Answer 1

Solution:

The net advantage to leasing (NAL) = $ 76,407.06

The scanner should be Leased as the NAL is positive.

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 = 25 % = 0.25

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

= 8 % * ( 1 - 0.25 ) = 8 % * 0.75 = 6 %

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