Hello,

I am working on a health care finance assignment. Question 2, Part B. According to my professor, the correct PV of Leasing is $145,035 and PV of Owning is $159,046. And the NAL = $14012. I don't understand where I'm going wrong. Part A is correct according to my professor.

UNDERSTANDING HEALTHCARE FINANCIAL MANAGEMENT Chapter 8 -- Lease Financing PROBLEM 2 Big Sky Hospital plans to obtain a new MRI that costs $1.5 million and has an estimated four-year useful life. It can obtain a bank loan for the entire amount and buy the MRI, or it can obtain a guideline lease for 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 $75,000 payable at the beginning of each year whether the MRI is leased or purchased. - Big Sky's marginal tax rate is 40 percent. - The bank loan would have an interest rate of 15 percent. - If leased, the lease payments would be $400,000 payable at the end of each of the next four years. - The estimated residual (and salvage) value is $250,000. a. What are the NAL and IRR of the lease? Interpret each value. b. Assume now that the salvage value estimate is $300,000, but all other facts remain the same. What is the new NAL? The new IRR? ANSWER (Hint: Use the following format as a guide.) UNDERSTANDING HEALTHCARE FINANCIAL MANAGEMENT PROBLEM 8 Walton Nursing Home (WNH) is evaluating a guideline lease agreement on laundry equipment that costs $250,000 and falls into the MACRS three-year class. The home can borrow at an 8 percent rate on a four-year loan if WHN decided to borrow and buy rather than lease. The laundry equipment has a four-year economic life, and its estimated residual value is $50,000 at the end of Year 4. If WHN buys the equipment, it would purchase a maintenance contract which costs $5,000 per year, payable at the beginning of each year. The lease terms, which include maintenance, call for a $71,000 lease payment at the beginning of each year. WNH's tax rate is 40 percent. Should the home lease or buy? ANSWER Data Cost of Owning Pre-tax Cost of Debt After-tax Cost of Debt 8.00% 4.80% Year 0 MACRS Allowances Depreciation Expense Net Purchase Price Maintenance Contract Maintenance Tax Savings Depreciation Tax Savings Residual Value/Salvage Value Tax on Residual Value Net Cash Flow PV of Owning Data Cost of Leasing Pre-tax Cost of Debt After-tax Cost of Debt Lease Payment Lease Tax Savings Net Cash Flow PV of Leasing Net advantage to leasing: PV cost of leasing PV cost of owning Net advantag to leasing or NAL Year 1 $ $250,000 $5,000 ($250,000) ($5,000) $2,000 33% 82,500.00 ($5,000) $2,000 $33,000 $50,000 40% $ (253,000.00) $ 30,000.00 ($142,034.73) 8.00% 4.80% $71,000 Year 0 ($71,000) $28,400 ($42,600) Year 1 ($71,000) $28,400 ($42,600) ($151,761.93) ($151,761.93) ($142,034.73) ($9,727.19) A negatie NAL indicates the leasing option equipment would not be the best choice. T buy the equipment. AL MANAGEMENT quipment that n 8 percent rate y equipment has a 4. If WHN buys e lease or buy? Year 2 $ $ Year 3 45% 112,500.00 $ 15% 37,500.00 $ ($5,000) $2,000 $45,000 ($5,000) $2,000 $15,000 42,000.00 $ Year 2 ($71,000) $28,400 ($42,600) Year 4 7% 17,500.00 $7,000 $50,000 ($20,000.00) 12,000.00 $ 37,000.00 Year 3 ($71,000) $28,400 ($42,600) Year 4 ($71,000) $28,400 ($42,600) tie NAL indicates the leasing option of the laundry ment would not be the best choice. The organization should e equipment. Maintenance is including in the price of the annual lease cluding in the price e