PROBLEM 1

A HCA hospital in Colorado plans to obtain a new MRI that costs $1.5 million and has an estimated four-year useful life. It can obtain a bank loan for the entire amount and buy the MRI, or it can obtain a guideline lease for the equipment. Assume that the following facts apply to the decision:

- The MRI falls into the three-year class for tax depreciation, so the MACRS allowances are 0.33, 0.45, 0.15, and 0.07 in Years 1 through 4, respectively.

- Estimated maintenance expenses are $75,000 payable at the beginning of each year whether the MRI is leased or purchased.

- HCA's marginal tax rate is 40 percent.

- The bank loan would have an interest rate of 15 percent.

- If leased, the lease payments would be $400,000 payable at the end of each of the next four years.

- The estimated residual (and salvage) value is $250,000.

a. What are the NAL and IRR of the lease? Interpret each value.

PROBLEM 2

West Hills Village (WHV) in Rapid City, South Dakota is evaluating a guideline lease agreement on laundry equipment that costs $250,000 and falls into the MACRS three-year class. The home can borrow at an 8 percent rate on a four-year loan if WHV decided to borrow and buy rather than lease. The laundry equipment has a four-year economic life, and its estimated residual value is $50,000 at the end of Year 4. If WHV buys the equipment, it would purchase a maintenance contract which costs $5,000 per year, payable at the beginning of each year. The lease terms, which include maintenance, call for a $71,000 lease payment at the beginning of each year. WNV's tax rate is 40 percent. Should the home lease or buy?