Financing Alternatives. Martin Hospital Corporation is a for-profit health care provider. The hospital's Capital Needs Committee has approved the acquisition of new magnetic resonance imaging (MRI) equipment. Before the final recommendation is sent to Martin's board of directors, financing choices must be evaluated. The equipment will cost \(\$ 1,000,000\), have a life of five years (assume straight-line depreciation), and have no salvage value. Three financing choices have been suggested.

Finance internally: Martin Corporation will pay the vendor from its cash balance on the date the machine is certified as ready for operations.
Finance with a bank loan: Martin would obtain a bank loan to finance 90 percent of the equipment cost at 10 percent annual interest. Five annual payments of \(\$ 237,418\) each would be due at the end of each year, beginning one year from the certification date. Martin will pay the remaining \(\$ 100,000\) from its cash balance at certification date.
Lease from a lessor: MedLease could lease the equipment to Martin for an initial \(\$ 50,000\) payment and five annual payments of \(\$ 220,000\) each starting one year from the certification date. At the lessee's option, the equipment can be purchased at the fair market value at the lease's termination. (The lessor is currently estimating a 30 percent residual value.) At this time, however, Martin does not plan to buy the machine.
Martin has a bank borrowing rate of 10 percent, a corporate hurdle rate of 12 percent, and a 40 percent income tax rate.
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1. Prepare a PV analysis as of the certification date of the expected aftertax cash flows for the three financing choices.

(a) Identify the discount rate(s) you used and explain why.

(b) Recommend the preferred financing choice.
2. Discuss the qualitative factors Martin should consider before a final financing decision is made