Like hospitals in many communities, Mortlach General Hospital is chronically short of the cash it needs to provide all the services required by its community. Management is continually looking for ways to save money or improve efficiencies. The hospital recently decided to add a new operating room to meet increasing demand. The cost of the new room is estimated to be about $500,000. The hospital foundation could provide the $500,000 needed. The foundation has the money on hand but since this was an unanticipated proposal, it would take money away from other purposes. An alternative proposal from a member of the board of directors with connections to commercial lenders would have a private lender finance the construction of the new operating room and lease it to the hospital. The lease would be for five years and would require monthly payments of $12,000. The hospital foundation would fundraise to cover the cost of the monthly lease payments. After five years, the hospital would own the operating room. Management considers an appropriate discount rate to be about 5 percent.

Required:

Prepare a report to management that explains fully whether Mortlach General Hospital should pay for the operating room in cash or accept the lease arrangement.