Student Name: Analyn B.
Metzger
Exercise Assignment Instructions:
Provide answers to each problem for each weekly exercise assignment.
Include any calculations, equations, and/or formulas for each question in the problem.
Show your work for each answer.
Submit Your Weekly Exercise Answers for the Excel Workbook to the Classroom by the Ass
for the Assigned Week(s).
PROBLEM 1: Week 7 and Week 8 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?
ment.
tion in the problem.
he Classroom by the Assigned Due Date
0
Net Purchase Price $1,500,000
buy the MRI, Maintenance Cost $75,000
pply to the decision: Maintenance Tax Savings $30,000
Depreciation Tax Savings
es are 0.33, 0.45, Residual Value
Residual Value Tax
r whether the MRI is Net Cash Flow $1,545,000
Bank Loan Interest rate 10%
Tax Rate 40%
next four years. After Tax Cost of Debt 6.00%
NPV owning @ 7% -₱953,345.59
0
Lease Payments $400,000
Tax Savings from Lease $160,000
Net Cash Flow $240,000
NPV cost of leasing @ 7% -₱831,625.35
NAL ₱121,720.24
0
Leasing Cash Flow $240,000
Owning Cash Flow $1,545,000
Incremental Cash Flow $1,305,000
IRR 1%
The organization should lease the MRI equipment.
Because the IRR is at 1% which is significantly lower
than the NAL of 7%, this would suggest that it would be
cheaper to lease the equipment than to buy it.
1 2 3 4
$75,000 $75,000 $75,000
$30,000 $30,000 $30,000
$198,000 $270,000 $90,000 $42,000
$250,000
$100,000
$153,000 $225,000 $45,000 $192,000
1 2 3
$400,000 $400,000 $400,000
$160,000 $160,000 $160,000
$240,000 $240,000 $240,000
1 2 3 4
$240,000 $240,000 $240,000 $0
$153,000 $225,000 $45,000 $192,000
$393,000 $465,000 $285,000 $192,000
on should lease the MRI equipment.
R is at 1% which is significantly lower
7%, this would suggest that it would be
ease the equipment than to buy it.
