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Hilltop Healthcare plans to acquire a piece of diagnostic equipment whixh costs $1.5 million. Hilltop can either lease the equipment for 4 years or borrow
Hilltop Healthcare plans to acquire a piece of diagnostic equipment whixh costs $1.5 million. Hilltop can either lease the equipment for 4 years or borrow the $1.5 million from a bank and buy the equipment. Hilltop's tax rate is 30% and the equipment falls into the MACRS three year class (33%, 45%, 15%, 7%). Hilltop has developed all associated cash flows except the depreciation tax savings. If Hilltop borrows and purchases the equipment, it bank would charge 4.5% interest (compounded annually) on the loan. Should Hilltop buy or lease the equiment? | |||||||||
Year 0 | Year 1 | Year 2 | Year 3 | Year 4 | |||||
Cash flows if purchased: | |||||||||
Net purchase price | (1,500,000) | ||||||||
Depreciation tax savings | |||||||||
Residual value | 90,000 | ||||||||
Tax on residual value | (27,000) | ||||||||
Net cash flow | (1,500,000) | - | - | - | 63,000 | ||||
Cash flows if leased: | |||||||||
Lease payment | (380,000) | (380,000) | (380,000) | (380,000) | |||||
Lease tax savings | 114,000 | 114,000 | 114,000 | 114,000 | |||||
(266,000) | (266,000) | (266,000) | (266,000) |
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