Big Sky Hospital plans to get a new MRI that costs $2.5 million and has an estimated useful life of four years. You can get a bank loan for the full amount and buy the MRI, or you can lease the equipment. Assume that the following facts apply to the decision:

The MRI falls into the three-year class for tax depreciation, so the MACRS allowances are 0.33, 0.45, 0.15, and 0.07 in years 1 through 4, respectively.

Estimated maintenance expenses are $175,000 payable at the beginning of each year whether the MRI is leased or purchased.

Big Sky's marginal tax rate is 35 percent.

The bank loan would carry an interest rate of 15 percent.

If leased, the lease (rent) payments would be $750,000 due at the end of each of the next four years.

Estimated salvage (and salvage) value is $500,000.

to. What are the NAL and the IRR of the lease? Interpret each value.

b. Should Big Sky Hospital lease or buy?

C. Now assume that the estimated salvage value is $300,000, but all other facts remain the same. What is the new NAL? The new IRR?

d. Did the new salvage value estimate change the decision to lease or buy?