Question

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 $6,200,000 and would be depreciated straight-line to zero over six years. Because of radiation contamination, it will actually be completely valueless in six years. You can lease it for $1,320,000 per year for six years. Assume that the tax rate is 23 percent. You can borrow at 8 percent before taxes.

Calculate the NAL. (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

Answer 1

The Net Annual Lease (NAL) for leasing a diagnostic scanner can be calculated by comparing the cost of leasing with the cost of borrowing and depreciating the scanner. By calculating the annual depreciation expense, tax savings from depreciation, and the after-tax cost of leasing, we can determine the NAL. Using the given information and a discount rate of 8 percent, the NAL is calculated to be $681,913.72.

Step-by-step explanation:

To calculate the Net Annual Lease (NAL), we need to compare the cost of leasing the diagnostic scanner with the cost of borrowing and depreciating it. First, let's calculate the annual depreciation expense for the scanner.

Since the scanner is depreciated straight-line over six years, the annual depreciation expense is $6,200,000 / 6 = $1,033,333.33.

We also need to calculate the tax savings from depreciation. At a tax rate of 23 percent, the tax savings from depreciation is $1,033,333.33 * 0.23 = $237,666.67.

Next, let's calculate the after-tax cost of leasing the scanner for six years. The annual leasing cost is $1,320,000. After subtracting the tax savings, the after-tax cost of leasing is $1,320,000 - $237,666.67 = $1,082,333.33.

Finally, we can calculate the NAL by discounting the after-tax cost of leasing and comparing it to the cost of borrowing. Using a discount rate of 8 percent, we can calculate the present value factor for six years as 1 / (1 + 0.08)^6 = 0.6302.

Multiplying the after-tax cost of leasing by the present value factor, we get $1,082,333.33 * 0.6302 = $681,913.72. Therefore, the Net Annual Lease is $681,913.72.