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 $. 2,000,000, and it would be depreciated straight-line to zero over four years. Because of radiation contamination, it will actually be completely valueless in four years. You can lease it for $600,000 per year for four years.
a. Assume that the tax rate is 35%. You can borrow at 8% before taxes. Should you lease or buy?
b. What are the cash flows from the lease from the lessor's viewpoint? Assume a 35% tax bracket.
c. What would the lease payment have to be for both lessor and lessee to be indifferent about the lease?
d. Assume that your company does not contemplate paying taxes for the next several years. What are the cash flows from leasing in this case?
e. In the previous requirement (d), over what range of lease payments will the lease be profitable for both parties?