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Question: Lease Financing
A HCA hospital in Colorado 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. - HCA'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. What are the NAL and IRR of the lease? Should the organization buy or lease the equipment?
Verified Expert
"The assessment is an experimental assignment in which a hospital is considering whether it should buy an MRI machine or not.With the support of the study, initially, the NAL and IRR of both buying and leasing options are estimated using the given cost details for each scenario.The value of NAL for the leasing option is found negative and this is an unfavorable situation in the time value of money principle.The organization is recommended to buy the machine over leasing it as its NAL is negative."
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