Check Work Econnect FINANCE er 21 Problems Question 1 (013) value: 8.33 points Y

Question

Check Work Econnect FINANCE er 21 Problems Question 1 (013) value: 8.33 points 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 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 $2,050,000 per year for five years. Assume that the tax rate is 35 percent. You can borrow at 12 percent before taxes. $7,510,000, and it would be ot round intermediate calculations and round your answer to 2 decimal Calculate the NAL D n places, e.g 32.18.) Should you lease or buy? Lease Buy Hints References eBook & Resources rk

Explanation / Answer

After-tax cost of borrowing= 12%(1-35%)=7.8% &

PVOA F 7.8%, 5 yrs=4.01385

Leasing is the best option

PV of Lease option: After-tax Annual lease payments 2050000*(1-35%)= 1332500 PV of lease payments 1332500*4.01385= 5348455 Purchase option: Annual repayment 7510000=Pmt*(1-1.078^-5)/0.078 Annual payment= 1871020 PV of Annual aftertax outflow 1871020*4.01385 7509994 Less:PV of depn. Tax shields 7510000/5*35% 525700 PVOA F 7.8%, 5 yrs. 525700*4.01385 2110081 PV of Purchase option 5399913 NET ADVANTAGE to Leasing 51458 (PV of purchase-PV of Leasing)

Related Questions

Navigate

• Browse (All)
• Browse C
• Subjects

---