Should Sage lease or buy the MRI machine? Assume a discount rate of 12% and the Tax rate of 36 percent
Case 26: Sage Imaging Center, Inc. The Sage Imaging Center is a multihospital system located in Columbus, Ohio. Over the past 10 years, Sage has grown from 2 radiologists to 15. There are currently five MRI machines and three CT scanning machines onsite. Today, Sage specializes in imaging services, which include MRI and CT scans. In 2019, Sage performed an average of 20 images per machine per day. Seventy-five percent of the images were from referrals from physician offices. Another 20% of the image work was outsourced from the Ohio State University, Wexner Medical Center. The remaining 5% were walk-in patients who practiced nontraditional health care. Sage bills approximately $1,450 per image. The fee for service includes diagnosis and the required report by the radiologists. The Sage CEO has projected a 25% increase in imaging based on the health care reform. The board of directors recently approved the acquisition of another MRI machine. Sage Imaging has two choices: (1) buy a refurbished MRI machine or (2) lease a new MRI machine for 3 years. The MRI machine has a useful life of 5 years and costs $350,000. Franklin County Bank is willing to loan Sage Imaging $315,000 at 5% interest and requires a down payment of $35,000 and annual payments due at the end of each of the next 5 years. Since Sage Imaging does not have the proper maintenance capabilities, the bank will require them to sign a maintenance contract with Wade International. The contract, good for 5 years of maintenance, requires annual payments of $7,000. Wade International made Sage Imaging a proposal that competes with the bank's offer. Wade International is willing to lease Sage Imaging the same MRI machine for 5 years. Since Sage Imaging's cash situation is tight, Wade International has structured the lease with the $80,841 payment due at the end of each year. In addition, Wade International is agreeing to perform all the maintenance during the lease period, give Sage Imaging the right to purchase the MRI machine at the end of 5 years for the prevailing market price (estimated to be $80,000), and allow the organization to buy a maintenance contract for 2 years on the MRI machine for $7,000 annually, paid at the end of Years 4 and 5. Case 26: Sage Imaging Center, Inc. The Sage Imaging Center is a multihospital system located in Columbus, Ohio. Over the past 10 years, Sage has grown from 2 radiologists to 15. There are currently five MRI machines and three CT scanning machines onsite. Today, Sage specializes in imaging services, which include MRI and CT scans. In 2019, Sage performed an average of 20 images per machine per day. Seventy-five percent of the images were from referrals from physician offices. Another 20% of the image work was outsourced from the Ohio State University, Wexner Medical Center. The remaining 5% were walk-in patients who practiced nontraditional health care. Sage bills approximately $1,450 per image. The fee for service includes diagnosis and the required report by the radiologists. The Sage CEO has projected a 25% increase in imaging based on the health care reform. The board of directors recently approved the acquisition of another MRI machine. Sage Imaging has two choices: (1) buy a refurbished MRI machine or (2) lease a new MRI machine for 3 years. The MRI machine has a useful life of 5 years and costs $350,000. Franklin County Bank is willing to loan Sage Imaging $315,000 at 5% interest and requires a down payment of $35,000 and annual payments due at the end of each of the next 5 years. Since Sage Imaging does not have the proper maintenance capabilities, the bank will require them to sign a maintenance contract with Wade International. The contract, good for 5 years of maintenance, requires annual payments of $7,000. Wade International made Sage Imaging a proposal that competes with the bank's offer. Wade International is willing to lease Sage Imaging the same MRI machine for 5 years. Since Sage Imaging's cash situation is tight, Wade International has structured the lease with the $80,841 payment due at the end of each year. In addition, Wade International is agreeing to perform all the maintenance during the lease period, give Sage Imaging the right to purchase the MRI machine at the end of 5 years for the prevailing market price (estimated to be $80,000), and allow the organization to buy a maintenance contract for 2 years on the MRI machine for $7,000 annually, paid at the end of Years 4 and 5
