Question

Healthcare Finance 18.2 Net reven Cash expe Depreciati Earni Interest Earni Taxes (40 Net profit Asset requ c. Is the financial risk of the business different under the two acquisi tion alternatives? 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 equip ment. 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 pur chased. • Big Sky's marginal tax rate is 40 percent. • The bank loan would have an interest rate of 15 percent. • Ifleased, 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 cach 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 Health Plan 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 in hun the com 18.5 A 18.3 Netr Cash

can you please show your work?

Answer 1

NAL of leasing = 108,048

IRR = 5.59%

Year (n) Formula 0 1 2 4 Cost of owning Purchase price (P) 1500000 75000 Maintenance cost (MC) 75000 75000 75000 40%*MC 30000 Maintenance tax savings (MTS) 30000 30000 30000 MACRS depreciation rate ('r) Depreciation (D) Depreciation tax shield (DTS) Salvage value (SV) Tax on salvage value (T) Net cash flow from owning (NCF1) 0.33 0.15 0.07 0.45 Pr 105000 675000 225000 495000 40% D 198000 270000 90000 42000 250000 40%*SV 100000 192000 -P-MC+MTS+DTS+SV-T 153000 225000 45000 -1545000 Cost of leasing Lease payment (L) Lease tax savings (LTS) 400000 400000 400000 400000 40%"L 160000 160000 160000 160000 Maintenance cost (MC) 75000 75000 75000 75000 40%MC Maintenance tax savings (MTS) 30000 30000 30000 30000 Net cash flow from leasing (NCF2) -285000 -285000 L-LTS+MC-MTS -45000 -285000 -240000 Incremental cash flows (ICF) NCF2 NCF1 1500000 -438000 -510000 -330000 -432000 NPV function with ICFS & NAL (leasing) discount rate 9% 108048 5.59% IRR function with ICFS IRR