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?

What is the net advantage (net disadvantage) to leasing from the Lessors 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.)

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)

e. Setting the lease payment. If the lessor pays taxes at 35% but the lessee does not pay taxes, over what range of lease payments will the lease be profitable to both parties?

f. MACRS Depreciation and Leasing Rework part a. of problem #5 assuming that the scanner will be depreciated as three-year property under MACRS (remember the MACRS depreciation percentages are: 33%, 45%, 15%, 7%, for years 1, 2, 3, 4, respectively.) Assume Lessees tax rate is 35%, as we assumed in part a.