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 $5,400,000, 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 $1,610,000 per year for four years.
1. Lease or Buy [LO3] Assume that the tax rate is 35 percent. You can borrow at 8 percent before taxes. Should you lease or buy?
2. Leasing Cash Flows [LO3] What is the NAL of the lease from the lessor's viewpoint? Assume a 35 percent tax bracket.
3. Finding the Break-Even Payment [LO3] What would the lease payment have to be for both lessor and lessee to be indifferent about the lease?
4. Taxes and Leasing Cash Flows [LO3] Assume that your company does not anticipate paying taxes for the next several years. What are the cash flows from leasing in this case?
5. Setting the Lease Payment [LO3] In the previous question, over what range of lease payments will the lease be profitable for both parties?
6. MACRS Depreciation and Leasing [LO3] Rework Problem 1 assuming that the scanner will be depreciated as three-year property under MACRS (see Chapter 10 for the depreciation allowances).
7. Lease or Buy [LO3] What is the NAL for Wildcat? What is the maximum lease payment that would be acceptable to the company?