United Hospital has received a leasing proposal from Leasing, Inc. for a cardiac catheterization unit. The terms
Question:
United Hospital has received a leasing proposal from Leasing, Inc. for a cardiac catheterization unit. The terms are as follows:
■ Five-year lease
■ Annual payments of $200,000 payable 1 year in advance
■ Payment of property tax estimated to be $23,000 annually
■ Renewal at end of year 5 at fair market value Alternatively, United Hospital can buy the catheterization unit for $725,000. United Hospital must debt-finance this equipment. It anticipates a bank loan with an initial down payment of $125,000 and a 3-year term loan at 16%
with equal principal payments. The residual value of the equipment at year 5 is estimated to be $225,000. The lease is treated as an operating lease. Depreciation is calculated on a straight-line basis. Assuming a discount rate of 14%, what financing option should United Hospital select? Assume that there is no reimbursement of capital costs.
Step by Step Answer:
Essentials Of Health Care Finance
ISBN: 9781284094633
8th Edition
Authors: William O. Cleverley, James O. Cleverley