You work for a nuclear research laboratory that is contemplating leasing a diagnostic scanner (leasing is a common practice with expensive, high-tech equipment). The scanner costs $5,800,000, and it would be depreciated straight-line to zero over four years. Because of radiation contamination, it will actually be completely valueless in four years. You can lease it for $1,690,000 per year for four years.

1. Lease or Buy Assume that the tax rate is 35 percent. You can borrow at 8 percent before taxes. Should you lease or buy?

2. Leasing Cash Flows What are the cash flows from the lease from the lessors viewpoint? Assume a 35 percent tax bracket.

3. Finding the Break-Even Payment What would the lease payment have to be for both the lessor and the lessee to be indifferent about the lease?