Chapter 8 Problem 2 Big Sky Hospital plans to obtain a new MRI that costs $1.5 million and has an estimated four-year useful life. It can obtain a bank loan for the entire amount and buy the MRI, or it can obtain a guideline

HCM565

Module 5 CT

 

Chapter 8 Problem 2

Big Sky Hospital plans to obtain a new MRI that costs $1.5 million and has an estimated four-year useful life. It can obtain a bank loan for the entire amount and buy the MRI, or it can obtain a guideline lease for the equipment. Assume that the following facts apply to the decision:

 

– The MRI falls into the three-year class for tax depreciation, so the MACRS allowances are 0.33, 0.45, 0.15, and 0.07 in Years 1 through 4, respectively.

– Estimated maintenance expenses are $75,000 payable at the beginning of each year whether the MRI is leased or purchased.

– Big Sky’s marginal tax rate is 40 percent.

– The bank loan would have an interest rate of 15 percent.

– If leased, the lease payments would be $400,000 payable at the end of each of the next four years.

– The estimated residual (and salvage) value is $250,000.

 

  1. What are the NAL and IRR of the lease? Interpret each value.
  2. Assume now that the salvage value estimate is $300,000, but all other facts remain the same. What is the new NAL? The new IRR?

 

(Hint: Use the following format as a guide.)

 

Year 0 Year 1 Year 2 Year 3 Year 4
Cost of owning:
Net purchase price
Maintenance cost
Maintenance tax savings
Depreciation tax savings
Residual value
Tax on residual value
Net cash flow
Cost of leasing:
Lease payment
Lease tax savings
Maintenance cost
Maintenance tax savings
Net cash flow
Net advantage to leasing:
PV cost of leasing
PV cost of owning
NAL

 

 

Chapter 8 Problem 8

Walton Nursing Home (WNH) is evaluating a guideline lease agreement on laundry equipment that costs $250,000 and falls into the MACRS three-year class. The home can borrow at an 8 percent rate on a four-year loan if WHN decided to borrow and buy rather than lease. The laundry equipment has a four-year economic life, and its estimated residual value is $50,000 at the end of Year 4. If WHN buys the equipment, it would purchase a maintenance contract which costs $5,000 per year, payable at the beginning of each year. The lease terms, which include maintenance, call for a $71,000 lease payment at the beginning of each year. WNH’s tax rate is 40 percent. Should the home lease or buy?

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