AHS must install a new $1.5 million computer to track patient records in its multiple service areas. It plans to use the computer for only 3 years, at that time a new system will be acquired that will handle both billing and patient records. The company can borrow money at a before-tax cost of 10%. In lieu of buying, AHS could lease the computer for 3 years.
Assume that the following facts apply:
1. The computer falls into the 3-year class for tax depreciation, so the modified accelerated cost recovery system (MACRS) allowances are 0.33, 0.45, 0.15, and 0.07 in Year 1 through Year 4, respectively.
2. The company's marginal tax rate is 34%.
3. Tentative lease terms call for payments of $500,000 at the beginning of each year.
4. The best estimate for the value of the computer after 4 years of wear and tear is $300,000.
What is the internal rate of return (IRR) of the lease?