Expert answer:Finance Problems

Solved by verified expert:Show your calculations used to derive your answers. If the problems require narrative answers as well as calculations, you must format those answers using APA style. Sources should not be more than 5 years old and in text citation is a must.The text book for this course is Gapenski, L. C., & Pink, G. H. (2015). Understanding healthcare financial management (7th ed.). Chicago, Ill.: Health Administration Press.Please show all your work. Show how you get to the answer. No plagiarism please and formal writing with APA format.
chapter_8_problems_2___8.xls

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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 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.
– Big Sky’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.
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
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
Year 1
Year 2
Year 3
Year 4
eline lease for
UNDERSTANDING HEALTHCARE FINANCIAL MANAGEMENT
Chapter 8 — Lease Financing
PROBLEM 8
Walton Nursing Home (WNH) is evaluating a guideline lease agreement on laundry equipment that
costs $250,000 and falls into the MACRS three-year class. The home can borrow at an 8 percent rate
on a four-year loan if WHN decided to borrow and buy rather than lease. The laundry equipment has a
four-year economic life, and its estimated residual value is $50,000 at the end of Year 4. If WHN buys
the equipment, it would purchase a maintenance contract which costs $5,000 per year, payable at
the beginning of each year. The lease terms, which include maintenance, call for a $71,000 lease
payment at the beginning of each year. WNH’s tax rate is 40 percent. Should the home lease or buy?
ANSWER
…
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