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 $3.5 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 $875,000 per year for 4 years.Assume the tax rate is 33 percent.You can borrow at 10 percent before taxes.What is the net advantage to leasing from your company's standpoint?
A)$468,216
B)$491,319
C)$516,007
D)$530,468
E)$541,747

Question

Quizplus · Accepted Answer

Depreciation tax shield = ($3,500,000/4)(0.33) = $288,750Aftertax lease payment = $875,000 (1 - 0.33) = $586,250OCF = $288,750 + $586,250 = $875,000Aftertax cost of debt = 0.1(1 - 0.33) = 0.067NAL = $3,500,000 - $875,000(PVIFA_{6.7%, 4}) = $516,007

You Work for a Nuclear Research Laboratory That Is Contemplating