What is your recommendation? Should the facility lease or buy the equipment?

Your local Facility (You provide the name) wants to install upgrades to its IT systems. The cost of these upgrades is estimated at $1.2 million. The Hospital can obtain a bank loan for 100% of the purchase price or it can lease the equipment. Assume the following:

• the machinery falls into the MACRS 5-year class
• Loan rate is 10%
• The Hospitals tax rate is 30%
• The lease terms call for $300k payments at the end of the next 5 years
• The terms of the loan call for Interest payments only for years 1 5, with interest plus the principal amount at the end of Year 5.
• Under either the Lease or the Purchase, the Hospital must pay for insurance, property taxes, and maintenance.
• Assume the Hospital will continue to use the equipment beyond the expiration of the lease and may purchase it at an estimated residual value of $200k at the end of year 5.