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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)
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 $4,900,000 and it would be depreciated straight-line to zero over four years. Because of radiation contamination, it actually will be completely valueless in four years. You can lease it for $1,400,000 per year for four years. The tax rate is 24 percent. You can borrow at 6 percent before taxes. What is the NAL of the lease from the lessor's viewpoint? (A negative answer should be indicated by a minus sign. Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) Answer is complete but not entirely correct. NAL $ 48,856,89
Expert Solution
WORKINGS:
Working Note 1:
Computation of Depreciation of Scanner on SLM basis with zero scrap value:
Cost of Scanner = $4,900,000
Life of Scanner = 4 Years
Depreciation = (Cost – Scrap Value)/Life
Depreciation = (4,900,000 – 0)/4
Depreciation = $1,225,000
Working Note 2:
Computation of appropriate discount rate for evaluation:
Since the lessor can borrow at the rate of 6% before tax
Tax Rate is 24%
Appropriate Discount Factor = Cost of finance 6% - Tax 24%
= 6%*(1-0.24) = 4.56%
Working Note 3:
Computation of Present Value of Annuity Factor (PVAF) @ 4.56% for 4 Years:
|
Year |
PV Factor @ 4.56% = Discount Factor Formula |
PV Factor @4.56% |
|
1 |
(1/1.0456)^1 |
0.956389 |
|
2 |
(1/1.0456)^2 |
0.914679 |
|
3 |
(1/1.0456)^3 |
0.874789 |
|
4 |
(1/1.0456)^4 |
0.836638 |
|
Present Value Annuity Factor (4.56%, 4 Years) |
3.582495 |
COMPUTATION OF NAL FROM LESSOR'S VIEWPOINT:
| Working Note Number | Particulars | Amount (in $) |
| Lease Rent per Year | 14,00,000.00 | |
| Note 1 | Less: Depreciation on SLM Basis per Year | 12,25,000.00 |
| Earnings Before Tax | 1,75,000.00 | |
| Less: Tax @24% | 42,000.00 | |
| Earnings After Tax | 1,33,000.00 | |
| Add: Depreciation | 12,25,000.00 | |
| Cash Flow After Tax (CFAT) per Year | 13,58,000.00 | |
| Note 3 | Present Value Annuity Factor (4.56%, 4 Years) | 3.582495 |
| Present Value of all cash Inflows (PVCI) = CFAT*PVAF | 48,65,028.38 | |
| Less: Cost of Scanner/Present value of Cash Outflows (PVCO) | 49,00,000.00 | |
| NPV = PVCI-PVCO or NAL | -34,971.62 |
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