Dr. Gall, of Hells Pass Hospital (HPH), has requested that the hospital invest in a robotic surgery system. These systems facilitate complicated surgeries and hold the potential to improve quality and reduce length of stay. Dr. Gall has selected the RUR-1000, manufactured by Rossums Universal Robots.

The RUR-1000 has a purchase price of $1,700,000 including installation and delivery charges. This machine falls into the MACRS 5-year class with current allowances of 0.20, 0.32, 0.19, 0.12, 0.11, and 0.06 in years 1-6 respectively. Rossums manufacturer warranty and maintenance policy costs $150,000 per year payable at the beginning of each year if owned by HPH. HPH is a nonprofit hospital and has a corporate cost of capital of 8%.

While the equipment has a six-year expected useful life, the hospital would only use the asset for four years. The anticipated scrap value at the end of four years is $115,000 assuming HPH owned the equipment. Due to the somewhat higher risk associated with the scrap value add 2% to the scrap value discount rate.

This purchase could be financed by a four-year simple interest conventional bank note that would carry an 8% interest charge (i.e., a normal looking loan with an 8% cost of capital).

Alternatively, the equipment could be leased for $555,000 per year from Hejny Rentals, with each payment payable at the beginning of the year and the first payment due on delivery (i.e., time=0).

If the RUR-1000 is acquired, HPH expects to treat 70 patients during the first year and 120 patients each year during the second through fourth years. On average, per procedure prices and costs will be $10,400 and $4,960 respectively. The hospital expects that per procedure prices and costs (but not quantities) will grow by 5% per year. To make things easier, assume that per procedure revenues and costs occur at the end of each year (i.e., not at time 0 but at times 1, 2, 3, and 4).

Questions

Is the robotic surgery investment financially acceptable (e., profitable) if the equipment is purchased?

Is the investment financially acceptable if the equipment is leased at the stated lease price?

Based on 1, and 2, should the project go forward and should HPH lease or buy?