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 $2 million and it would be depreciated straight-line to zero over 4 years. Because of radiation contamination, it will actually be completely valueless in 4 years. You can lease it for $500,000 per year for 4 years. Assume the tax rate is 34 percent. You can borrow at 10 percent before taxes. What is the net advantage to leasing from the lessor's viewpoint?

Question

Quizplus · Accepted Answer

Depreciation tax shield = ($2,000,000/4)(0.34) = $170,000Aftertax lease payment = $500,000 (1 - 0.34) = $330,000OCF = $170,000 + $330,000 = $500,000Aftertax cost of debt = 0.1(1 - 0.34) = 0.066NAL = -$2,000,000 + $500,000(PVIFA_{6.6%, 4}) = $290,988

You Work for a Nuclear Research Laboratory That Is Contemplating