CASE 1 (20 points)

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 4,800,000, and it would be depreciated straight-line to zero over four years. Because of radiation contamination, it actually will be completely valueless in four years. You can lease it for 1,430,000 per year for four years. You can borrow at 8 percent before taxes. Assume that the tax rate is 21 percent.

Instructions:

* a. Create a lease-versus-buy analysis. Calculate the NPV of leasing. Should you lease or buy? (10 points)

* b. What are the differences between an operating lease and a financial lease? (10 points)