A hospital has decided to replace an important piece of medical equipment at a cost of

£30000.

The expected life of the equipment is five years and it will have a resale value of £4000 at this time. The hospital is trying to decide how to finance the purchase.

One option is to buy the equipment outright. A second option is to obtain the equipment under a credit agreement with a finance company. Under this agreement the hospital will pay £10 000 now and £5500 at the beginning of each subsequent year.

A third option is to enter into a leasing agreement. Under this agreement the hospital will pay an initial amount of £9000 at the start of the first year. At the start of each subsequent year another payment will be needed which will be the previous year’s payment less 12 per cent. The current cost of capital for the hospital is 9 per cent.

Which of the three options would you recommend?