HCA Mission Healthcare needs a piece of diagnostic equipment that costs $1 million. Mission
can either lease the equipment or borrow $1 million from a local bank and buy the equipment.
Mission's tax rate is 30 percent, and the equipment falls into the three year class. If Mission
leases the equipment, the payment would be $260 thousand per year for four years, payable at
the beginning of each year. If Mission borrows and buys, its bank would charge 6 percent
interest (compounded annually) on the loan. Should Mission buy or lease the equipment?
ANSWER
Step 1 - Identify the relevant data and calculate the after-tax cost of debt
Purchase price		$0		MACRS recovery percentages
Lease payment		$0		Year 1	%
Residual value		$0		Year 2	%
Before-tax cost of debt		0%		Year 3	%
Tax rate		0%		Year 4	%
After-tax cost of debt		0.00%

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