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.
a. What are the NAL and IRR of the lease? Interpret each value.
b. 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.)
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Year 0
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Year 1
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Year 2
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Year 3
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Year 4
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Cost of owning:
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Net purchase price
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Maintenance cost
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Maintenance tax savings
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Depreciation tax savings
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Residual value
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Tax on residual value
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Net cash flow
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Cost of leasing:
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Lease payment
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Lease tax savings
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Maintenance cost
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Maintenance tax savings
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Net cash flow
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Net advantage to leasing:
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PV cost of leasing
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PV cost of owning
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NAL
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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 rateon 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 buysthe equipment, it would purchase a maintenance contract which costs $5,000 per year, payable atthe beginning of each year. The lease terms, which include maintenance, call for a $71,000 leasepayment at the beginning of each year. WNH's tax rate is 40 percent. Should the home lease or buy?