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 $1,050,000 per year for 4 years. Assume the tax rate is 32 percent. You can borrow at 8 percent before taxes. What is the net advantage to leasing (NAL) from your company's standpoint?

Multiple Choice
a. $−159.769.01
b. $−331,118.34
c. $348,545.62

Answer 1

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Answer 2

To calculate the Net Advantage to Leasing (NAL), we compare the net cash flows associated with the leasing and borrowing options. The NAL is the difference between the present values of the cash flows for the leasing and borrowing options. In this case, the NAL is $-331,118.34.

Step-by-step explanation:

To calculate the Net Advantage to Leasing (NAL), we need to compare the net cash flows associated with the leasing option and the borrowing option. The net cash flow for the leasing option is the lease payment minus the tax savings. The tax savings is calculated by multiplying the tax rate by the depreciation expense.

For the borrowing option, we calculate the net cash flow by subtracting the interest expense from the tax savings. The tax savings is calculated by multiplying the tax rate by the depreciation expense.

After calculating the net cash flows for both options, we sum up the present values of the cash flows for each year. The NAL is the difference between the present values of the cash flows for the leasing option and the borrowing option.

Plugging in the given values and performing the calculations, the NAL is $-331,118.34. Therefore, the net advantage to leasing from your company's standpoint is $-331,118.34.