What is the net advantage to leasing

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1. Lease or Buy Mets nuclear research laboratory is contemplating leasing a diagnostic scanner (leasing is a common practice with expensive high-tech equipment). The scanner costs $6,300,000, and it would be depreciated straight-line to zero over four years. Because of radiation contamination, it actually will be completely worthless after four years. You can lease it for a lease payment of $1,875,000 per year for four years.

a. Lease or Buy Assume that the tax rate is 35 percent. You can borrow at 8 percent before taxes. Should the company lease or buy? (Calculate the Net Advantage to Leasing vs. Buying and see if it is positive or negative.) What is the Net Advantage to Leasing?

  1. What is the net advantage (net disadvantage) to leasing from the Lessor's viewpoint (assume that that Lessor is in the same tax bracket (35%) as the Lessee. (You do not need to do any more calculations; just think of the answer.)
  2. Finding the Break-even Payment What would the lease payment have to be for both the lessor and lessee to be indifferent about the lease?

d. Taxes and Leasing Cash Flows  Assume that Mets does not anticipate paying taxes for the next four years. What are the cash flows from leasing in this situation?  (Calculate the Net Advantage to Leasing vs. Buying)

Reference no: EM131317607

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