New Health Hospital Systems wants to either borrow money to purchase a hospital

Question

New Health Hospital Systems wants to either borrow money to purchase a hospital or else enter into a lease agreement with the city of Chesterville. The purchase price of the hospital is $35 million. Assuming 100% financing, the interest rate is 8% for the loan with an after-tax cost of debt of 5%. The length of the loan is 5 years. The before-tax lease payments are expected to be $8 million per year. The tax rate is 40%n for New Health System. Should New Health System lease or borrow the money to purchase the hospital? Please explain your answer and show all your work.

Explanation / Answer

Assuming that the systems have 100% resale value, thus: lease payments = 8*.6 = 4.8million Int. cost = 35*.05 = 1.75million, thus borrowing is better. Actually, the following details are missing: Resale value of the systems incase systems are purchased. The structure of repayment ie whether 35 is repaid after 5 years or yearly 7 for 5 years. Please consider the time devoted to make this reply by rating this as 5star. Thank u in advance. God bless u :)

Related Questions

Navigate

• Browse (All)
• Browse N
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.