Introduction This test combines several concepts from class. First, you must develop a set of simple models describing the profitability of an investment. Second, you must consider the choice of leasing vs. buying and model the lessee's and lessor's profitability Problem one backg Dr. Gall, of Hell's 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 (it's my understanding that the clinical evidence on robotic surgery is inconclusive and the following details are contrived to focus on class concepts/skills rather than the reality of robotic surgery) Dr. Gall has selected the RUR-1000, manufactured by Rossum's 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. Rossum's 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 additional risk is the same for HPH and einx The manufacturer will offer's financing that requires 20% down and offers a 6% interest rate financed over a six-year period. They can offer the lower interest rate as the equipment is used as collateral (i.e., they can repo the liposuction machine) and any outstanding principal must be repaid if the equipment is scrapped or resold. You may assume that the loan is paid annually at the end of the year Alternatively, the equipment could be leased for $555,000 per year from teinx Rentals, with each payment payable at the beginning of the year and the first payment due on delivery (.., time-0. ueve would purchase the RUR-1000 at the same price but they would pay upfront with cash. Their maintenance contract would cost $100,000 per year payable at the beginning of the year. beiw. however, can borrow at 796, has a 40% tax rate, a 9% cost of equity and uses 40% debt financing. They would have a $220,000 scrap value at the end of four years. If the RUR-1000 is acquired, HPH expects to treat 70 patients during the first year and 120 patients 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 (.e., not at time 0 but at times 1, 2, 3, and 4) Questions Specific questions should be answered in a single excel document and explained with one or two sentences each. Is the robotic surgery investment financially acceptable (e profitable) if the equipment is purchased? 1. Could you negotiate a lower lease price with the lessor and would this change your decision to lease vs Introduction This test combines several concepts from class. First, you must develop a set of simple models describing the profitability of an investment. Second, you must consider the choice of leasing vs. buying and model the lessee's and lessor's profitability Problem one backg Dr. Gall, of Hell's 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 (it's my understanding that the clinical evidence on robotic surgery is inconclusive and the following details are contrived to focus on class concepts/skills rather than the reality of robotic surgery) Dr. Gall has selected the RUR-1000, manufactured by Rossum's 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. Rossum's 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 additional risk is the same for HPH and einx The manufacturer will offer's financing that requires 20% down and offers a 6% interest rate financed over a six-year period. They can offer the lower interest rate as the equipment is used as collateral (i.e., they can repo the liposuction machine) and any outstanding principal must be repaid if the equipment is scrapped or resold. You may assume that the loan is paid annually at the end of the year Alternatively, the equipment could be leased for $555,000 per year from teinx Rentals, with each payment payable at the beginning of the year and the first payment due on delivery (.., time-0. ueve would purchase the RUR-1000 at the same price but they would pay upfront with cash. Their maintenance contract would cost $100,000 per year payable at the beginning of the year. beiw. however, can borrow at 796, has a 40% tax rate, a 9% cost of equity and uses 40% debt financing. They would have a $220,000 scrap value at the end of four years. If the RUR-1000 is acquired, HPH expects to treat 70 patients during the first year and 120 patients 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 (.e., not at time 0 but at times 1, 2, 3, and 4) Questions Specific questions should be answered in a single excel document and explained with one or two sentences each. Is the robotic surgery investment financially acceptable (e profitable) if the equipment is purchased? 1. Could you negotiate a lower lease price with the lessor and would this change your decision to lease vs