Lease Financing
Healthcare Finance
University
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	0	0	0	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