HEALTHCARE FINANCIAL MANAGEMENT

healthcare_financial_management_1.xls

Problem 1

	UNDERSTANDING HEALTHCARE FINANCIAL MANAGEMENT				5/1/10

		Chapter 8 -- Lease Financing

PROBLEM 1
Suncoast Healthcare is planning to acquire a new x-ray machine that costs $200,000. The business can
either lease the machine using an operating lease or buy it using a loan from a local bank. Suncoast's
balance sheet prior to acquiring the machine is as follows:

Current assets		$100,000	Debt	$400,000
Net fixed assets		$900,000	Equity	$600,000
Total assets		$1,000,000	Total claims	$1,000,000

a. What is Suncoast's current debt ratio?
b. What would the new debt ratio be if the machine were leased? If it is purchased?
c. Is the financial risk of the business different under the two acquisition alternatives?

ANSWER

	UNDERSTANDING HEALTHCARE FINANCIAL MANAGEMENT

		Chapter 8 -- Lease Financing

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 lease 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 (rental) 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?

ANSWER
(Hint: Use the following format as a guide.)

			Year 0	Year 1	Year 2	Year 3	Year 4
Cost of owning:
Net purchase price
Maintenance cost
Maintenance tax savings
Depreciation tax savings
Residual value
Tax on residual value
Net cash flow

Cost of leasing:
Lease payment
Lease tax savings
Maintenance cost
Maintenance tax savings
Net cash flow

Net advantage to leasing:
PV cost of leasing
PV cost of owning
NAL

	UNDERSTANDING HEALTHCARE FINANCIAL MANAGEMENT

		Chapter 8 -- Lease Financing

PROBLEM 3
HealthPlan Northwest must install a new $1 million computer to track patient records in its three service
areas. It plans to use the computer for only three years, at which time a brand new system will be acquired
that will handle both billing and patient records. The company can obtain a 10 percent bank loan to buy
the computer or it can lease the computer for three years. Assume that the following facts apply to the
decision:

- The computer 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.
- The company's marginal tax rate is 34 percent.
-Tentative lease terms call for payments of $320,000 at the end of each year.
- The best estimate for the value of the computer after three years of wear and tear is $200,000.

a. What are the NAL and IRR of the lease? Interpret each value.
b. Assume now that the bank loan would cost 15 percent, but all other facts remain the same. What is the
new NAL? The new IRR?

ANSWER

	UNDERSTANDING HEALTHCARE FINANCIAL MANAGEMENT

		Chapter 8 -- Lease Financing

PROBLEM 4
Reynolds Imaging needs a piece of diagnostic equipment that costs $200 thousand. Reynolds can either
lease the equipment or borrow $200 thousand from a local bank and buy the equipment. Reynolds tax
rate is 40 percent and the equipment depreciation would be $100 thousand per year. If the company
leased the asset on a 2-year lease, the payment would be $110 thousand at the beginning of each year.
If Reynolds borrowed and bought, the bank would charge 10 percent interest on the loan. Should
Reynolds buy or lease the equipment?

ANSWER