CASE 1

You work for a medical research laboratory that is contemplating leasing a diagnostic scanner (leasing is a common practice with expensive, high-tech equipment). The scanner costs 4,000,000, and it would be depreciated straight-line to zero over four years. Because of radiation contamination, the scanner will be worthless in four years. You can lease the scanner for 900,000 per year for four years. You can borrow at 5 percent before taxes. Assume that the tax rate is 20 percent.

Instructions:

a. Create a lease-versus-buy analysis. Calculate the NPV of leasing. Should you lease or buy?

b. Explain the impact of leasing on the balance sheet.