Question

Please include an Excel step by step process. Thank you Big Sky Hospital plans to obtain...

Please include an Excel step by step process. Thank you

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?

Homework Answers

Answer #1

Answer a)

Year 0 Year 1 Year 2 Year 3 Year 4
Cost of owning: ($1,500,000)
Net purchase price
Maintenance cost ($75,000) ($75,000) ($75,000) ($75,000) $0
Maintenance tax savings $30,000 $30,000 $30,000 $30,000
Depreciation tax savings $198,000 $270,000 $90,000 $42,000
Residual value $250,000
Tax on residual value ($100,000)
Net cash flow $1,575,000 $153,000 $225,000 $45,000 $222,000
PV (net cash flow) ($1,575,000) $133,043 $170,132 $29,588 $126,929
Cost of leasing:
Lease payment ($400,000) ($400,000) ($400,000) ($400,000)
Lease tax savings $160,000 $160,000 $160,000 $160,000
Maintenance cost ($75,000) ($75,000) ($75,000) ($75,000) $0
Maintenance tax savings $30,000 $30,000 $30,000 $30,000
Net cash flow ($75,000) ($285,000) ($285,000) ($285,000) ($210,000)
PV (net cash flow) ($75,000) ($247,826) ($215,501) ($187,392) ($120,068)
Discounting rate 15%
Net advantage to leasing:
PV cost of leasing ($845,787.34)
PV cost of owning ($1,115,306.75)
NAL $269,519.41
Year 0 Year 1 Year 2 Year 3 Year 4
Net cash flow from buying ($1,575,000) $153,000 $225,000 $45,000 $222,000
Net cash flow from leasing $75,000 $285,000 $285,000 $285,000 $210,000
Net Cash flow ($1,500,000) $438,000 $510,000 $330,000 $432,000
IRR 5.59%

Answer b) Now with change in salvage value :

Year 0 Year 1 Year 2 Year 3 Year 4
Cost of owning: ($1,500,000)
Net purchase price
Maintenance cost ($75,000) ($75,000) ($75,000) ($75,000) $0
Maintenance tax savings $30,000 $30,000 $30,000 $30,000
Depreciation tax savings $198,000 $270,000 $90,000 $42,000
Residual value $350,000
Tax on residual value ($140,000)
Net cash flow $1,575,000 $153,000 $225,000 $45,000 $282,000
PV (net cash flow) ($1,575,000) $133,043 $170,132 $29,588 $161,234
Cost of leasing:
Lease payment ($400,000) ($400,000) ($400,000) ($400,000)
Lease tax savings $160,000 $160,000 $160,000 $160,000
Maintenance cost ($75,000) ($75,000) ($75,000) ($75,000) $0
Maintenance tax savings $30,000 $30,000 $30,000 $30,000
Net cash flow ($75,000) ($285,000) ($285,000) ($285,000) ($210,000)
PV (net cash flow) ($75,000) ($247,826) ($215,501) ($187,392) ($120,068)
Discounting rate 15%
Net advantage to leasing:
PV cost of leasing ($845,787.34)
PV cost of owning ($1,081,001.55)
NAL $235,214.21
Year 0 Year 1 Year 2 Year 3 Year 4
Net cash flow from buying ($1,575,000) $153,000 $225,000 $45,000 $282,000
Net cash flow from leasing $75,000 $285,000 $285,000 $285,000 $210,000
Net Cash flow ($1,500,000) $438,000 $510,000 $330,000 $492,000
IRR 6.99%
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