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?
Depreciation tax shield = ($2,000,000/4)(0.34) = $170,000
Aftertax lease payment = $475,000 (1 - 0.34) = $313,500 OCF = $170,000 + $313,500 = $483,500 Aftertax cost of debt = 0.1(1 - 0.34) = 0.066 NAL = -$2,000,000 + $483,500 (PVIFA6.6%, 4) = -$376,439 |
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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. Assume the tax rate is 33 percent. You can borrow at 6 percent before taxes. How much would the lease payment have to be in order for both the lessor and the lessee to be indifferent about the lease?
Aftertax debt cost = 0.06(1 - 0.33) = 0.0402
NAL = 0 = $2,000,000 - OCF (PVIFA4.02%, 4); OCF = $551,239.82 Depreciation tax shield = ($2,000,000/4) (0.33) = $165,000 Aftertax lease payment = $551,239.82 - $165,000 = $386,239.82 Breakeven lease payment = $386,239.82/(1 - 0.33) = $576,477 |
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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 $2.2 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 $600,000 per year for 4 years. Assume your company does not contemplate paying taxes for the next several years. You can borrow at 6 percent before taxes. What is the net advantage to leasing from your company's standpoint?
Cost of debt = 0.06
Annual cost of leasing = $600,000 NAL = $2,200,000 -$600,000(PVIFA6%, 4) = $120,937 |
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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 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 $750,000 per year for 4 years. Assume the tax rate is 31 percent. You can borrow at 8 percent before taxes. Your company does not expect to pay taxes for the next several years, but the leasing company will pay taxes. What range of lease payments will allow the lease to be profitable for both parties?
Aftertax cost of debt = 0.08(1 - 0.31) = 0.0552
NAL = 0 = $3,000,000 - OCF (PVIFA5.52%, 4); OCF = $856,278.27 Depreciation tax shield = ($3,000,000/4) (0.31) = $232,500 Aftertax lease payment = $856,278.27 - $232,500 = $623,778.27 Breakeven lease payment = $623,778.27/(1 - 0.31) = $904,026 Since the lessor pays taxes, it will break even with a payment of $904,026. For the lessee, we need to calculate the breakeven lease payment which results in a zero NAL. NAL = 0 = $3,000,000 - PMT (PVIFA8%, 4); PMT = $905,762 Payment range = $904,026 to $905,762 |
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