Question
Lower Merion Medical Center, a taxpaying entity, has made the decision to purchase a new laser surgical device. The device costs $1,200,000 and will be
Lower Merion Medical Center, a taxpaying entity, has made the decision to purchase a new laser surgical device. The device costs $1,200,000 and will be depreciated on a straight-line basis over 5 years to a zero salvage value. Lower Merion could borrow the full amount at a 6 percent rate for 5 years, which is also the implied borrowing rate for the lease. The after-tax cost of debt equals 4 percent. Alternatively, it could lease the device for 5 years. The before-tax lease payments per year would be $350,000. The tax rate for this center is 40 percent. From a financial perspective, should Lower Merion lease the surgical device or borrow the money to purchase it?
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