Question

A 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. - 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. a. What are the NAL and IRR of the lease? Interpret each value.

How to do this problem in EXCEL

Answer 1

Answer:

In case of leasing, the company will have to pay lease rent and maintenance expense for which the company will get a tax shield whereas it will not get tax shield in case of depreciation whereas in case of buying the MRI machine the company will get tax shield benefit of depreciation, maintenance also residual value will also be taken into consideration.

Workings:

Conclusion:

The company will get the benefit of $269136 Net advantage of leasing for opting for the leasing option.

In this the Internal Rate of Return is 10% whereas the interest on loan is 15% i.e the leasing is less expensive than buying