Which of the two financing plans is the least expensive

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You are considering two ways of financing a new hospital acquisition. You could arrange with a private investor group to buy the present facility for $50 million and lease it to you for $5.75 million per year over the next 15 years. You could then buy the facility for fair market value, which is assumed to be $80 million at the end of the 15th year.

Alternately, you could arrange for an 80 percent tax exempt bond with an effective interest rate of 8 percent. The bonds would be level debt service over 20 years. The remaining 20 percent could be provided from a taxable issue with a 10-year maturity. The effective interest rate would be 14 percent and the bonds would be level debt service.

Which of the two financing plans is the least expensive (i.e., has the lowest net present value if your cost of capital is 12 percent)? Ignore reimbursement and tax considerations.

 

Reference no: EM13340686

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