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 $475,000 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?

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Quizplus · Accepted Answer

Depreciation tax shield = ($2,000,000/4)(0.34) = $170,000Aftertax lease payment = $475,000 (1 - 0.34) = $313,500OCF = $170,000 + $313,500 = $483,500Aftertax cost of debt = 0.1(1 - 0.34) = 0.066NAL = -$2,000,000 + $483,500 (PVIFA_{6.6%, 4}) = -$376,439

You Work for a Nuclear Research Laboratory That Is Contemplating