Question
Mercy Medical Mega Center, a tax paying entity, has made the decision to purchase a new laser surgical device. The device costs $500,000 and will
Mercy Medical Mega Center, a tax paying entity, has made the decision to purchase a new laser surgical device. The device costs $500,000 and will be depreciated on a straight-line basis over five years to a zero salvage value. Mercy Medical could borrow the full amount at a12% rate for five years. The after-tax cost of debt equals 8%. Alternatively, it could lease the device for five years. The before tax lease payments per year would be $90,000. The tax rate is 35%. From a financial perspective, should Mercy lease the surgical device or borrow the money to purchase it? Show your work.
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