You work for a nuclear research laboratory that is contemplating leasing a diagnostic The scanner costs RM6,300,000 and it would be depreciated straight-line to zero over four years. You can lease it for RM1,745,000 per year for four years. Assume that the tax rate is 36%. You can borrow at 8% before taxes. Justify whether you should lease or buy.
- You work for a nuclear research laboratory that is contemplating leasing a diagnostic The scanner costs RM6,300,000 and it would be
depreciated straight-line to zero over four years. You can lease it for RM1,745,000 per year for four years. Assume that the tax rate is 36%. You can borrow at 8% before taxes. Justify whether you should lease or buy.
Calculate the depreciation of the machine for each year.
RM 6.3 mil /4 = ?
Calculate the tax shield.
RM 1,575,000 x 0.36 = RM 567,000
Calculate after tax lease payment
RM1,745,000 x (1 – 0.36) = RM 1,116,800
|
|
Yr 0 |
Yr 1 |
Yr 2 |
Yr 3 |
Yr 4 |
|
After Tax Lease Payment |
|
RM 1,116,800 |
RM 1,116,800 |
RM 1,116,800 |
RM 1,116,800 |
|
Depreciation tax shield |
|
RM 567,000 |
RM 567,000 |
RM 567,000 |
RM 567,000 |
|
Cost of Machine |
(RM 6.3 mil) |
|
|
|
|
|
Total Cash Flow |
(RM 6.3 mil) |
? |
? |
? |
? |
Approximate discount rate (after tax) = 0.08 x (1 – 0.36)
= ?
The
NPV = RM6,300,000 + RM1,683,800 x [1 – 1/(1.0512)4] / 0.0512
What is the decision? State your decision.
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