6. United Hospital has received a leasing proposal from Leasing, Inc., for a Sie

Question

6. United Hospital has received a leasing proposal from Leasing, Inc., for a Siemens cardiac

catheterization unit. The terms are:

• Five-year lease

• Annual payments of $200,000 payable one year in advance

• Payment of property tax estimated to be $23,000 annually

• Renewal at end of year 5 at fair market value

Alternatively, United Hospital can buy the catheterization unit for $725,000. This purchase

would require United Hospital to debt-finance this equipment. It anticipates a bank

loan with an initial down payment of $125,000 and a three-year term loan at 16 percent

with equal principal payments. The residual value of the equipment at year 5 is estimated

to be $225,000. The lease is treated as an operating lease. Depreciation is calculated on

a straight-line basis. Assuming a discount rate of 14 percent, what financing option

should United Hospital select? Assume that there is no reimbursement of capital costs.

Explanation / Answer

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1)

a.   n = 20   r = ?   PV = -$1,000   PMT = (1-0.34)60 = $39.6   FV = $1,000   r = 3.96%

      APY = 8.077%

b.   n = 10   r = ?   PV = -$1,000   PMT = $39.6   FV = $1,030 - $30 x 0.34 = $1,019.8   r

       = 4.124%

      APY = 8.418%

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