14.5 A private hospital needs to equip an operating theatre by installing new medical equipment. The equipment costs £700,000 to buy outright, and is expected to require continuing maintenance costs of £30,000 p.a. for five years. At the end of five years it is expected to have a scrap value of about £100,000. With the benefits deriving from the new equipment, the hospital can expect to generate extra income of about £300,000 p.a. for the first three years, falling to an additional £200,000 p.a.

for the remaining two years.

An alternative is to lease slightly more advanced equipment, which would require an initial deposit of £400,000, followed by five annual end-of-year payments of £120,000 each. The lessor will maintain the equipment and will reclaim the equipment at the end of Year 5. Income is expected to increase by £300,000 p.a. over the entire five-year period.

Assume that the cost of capital is 8% p.a.

Discount factors at 8% p.a. are:

Year Discount factor 1 0.926 2 0.857 3 0.794 Year Discount factor 4 0.735 5 0.681 Should the hospital buy or lease, and what additional information might be needed before a final decision is taken?