Chapter 8

profilesalvatrice

Hi, I need the 2 questions answered with all calculations.

#32. Purchase versus Lease. New Health Hospital Systems wants to either borrow money to purchase a hospital or else enter into a lease agreement with the city of Chesterville. The purchase price of the hospital is $35 million. Assuming 100% financing, the interest rate is 8% for the loan with an after-tax cost of debt of 5%. The length of the loan is 5 yrs. The before-tax lease payments are expected to be $8 million per year. The tax rate is 40% for New Health system. Should New Health system lease or borrow the money to purchase the hospital?

 #33.Purchase versus Lease. Carolina Ancillary Services for Hospitals (CASH), a tax-paying entity, is considering the purchase of a 64-slice computed tomographic scanner. The cost of the scanner is $2,000,000. The scanner would be depreciated over 10years on a straight-line basis to a zero salvage value. At the end of 5 yrs, the scanner could be sold for its book value, $1,000,000. The tax rate is 40%. The financing options include either borrowing for the full cost of the scanner and selling it at the end of year 5 or leasing one. The lease option is a 5yr lease with equal before-tax lease payments of $550,000 per year. The borrowing alternative is a 5 yr loan covering the entire cost of the scanner at an interest rate of 6%. The after-tax cost of debt is 4%. Should CASH lease the scanner or borrow the full amount to purchase it?

    • 8 years ago
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