Question

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 $3,000,000 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 33 percent. You can borrow at 8 percent before taxes. What is the net advantage to leasing (NAL) from your company's standpoint?

Answer 1

The net advantage to leasing (NAL) from your company's standpoint is $2,752,500.

Step-by-step explanation:

To determine the net advantage to leasing (NAL) from your company's standpoint, we need to compare the costs of leasing versus buying the scanner.

The cost of leasing the scanner for 4 years is $750,000 per year, resulting in a total lease cost of $3,000,000. On the other hand, if you buy the scanner, it will be depreciated straight-line to zero over 4 years.

Considering a tax rate of 33 percent, the net advantage to leasing (NAL) is calculated as follows:

1. Calculate the depreciation expense per year: $3,000,000 ÷ 4 years = $750,000 per year.
2. Calculate the tax savings from depreciation: $750,000 × 33% = $247,500.
3. Subtract the tax savings from the lease cost: $3,000,000 - $247,500 = $2,752,500.

The net advantage to leasing (NAL) from your company's standpoint is $2,752,500.