Question

Write a brief but persuasive argument on purchasing or leasing a new $25,000,000.00 piece of medical equipment.

Answer 1

Purchasing the equipment -

Benefits

1. The company can do as many tests it wants to without letting anybody knowing about it.

2. It can conduct tests for third party which can give addition to the revenue

3. When the equipment has been fully depreciated company can earn the revenue & it will flow into the bottomline after giving expenses

4. Lower interest rate make it more convincing to buy the equipment rather than leasing

Limitation

1. Higher investment - in buying one needs to arrange for finance upfront

2. Technology risk - company needs to buy new equipment if there is change in technology

3. Disposition Risk - Today’s medical equipment market remains at historic high prices, which increases the risk that the property value may be less when it is sold.

4. Management / Capital Expenses: When health systems own medical equipment, they have to manage and upkeep those assets, which most healthcare organizations are not in the business of doing.

Leasing the equipment -

Benefits

1. Flexibility: The tenant’s commitment to a location is more flexible.

2. Less Up-Front Capital: Traditionally, leasing has required less up-front capital.

3. Ease of Disposition: There are less costs associated with disposition.

Limitation

1. Lack of Control: A landlord could refuse to renew the tenant’s lease

2. Higher Occupancy Cost: Tenants typically have a higher on-going cost of occupancy than owners.

3. Lack of Terminal Value: Tenants do not own an asset with value at the end of the lease. As a result, the value of tenant’s lease payments and tenant improvement investments cannot be recaptured once the lease ends.