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- Download: https://solutionzip.com/downloads/chapter-8-problem-2-big-sky-hospital/
- Chapter 8 Problem 2
- Big Sky Hospital 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.
- - Big Sky'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.
- b. Assume now that the salvage value estimate is $300,000, but all other facts remain the same. What is the new NAL? The new IRR?
- (Hint: Use the following format as a guide.)
- Year 0 Year 1 Year 2 Year 3 Year 4
- Cost of owning:
- Net purchase price
- Maintenance cost
- Maintenance tax savings
- Depreciation tax savings
- Residual value
- Tax on residual value
- Net cash flow
- Cost of leasing:
- Lease payment
- Lease tax savings
- Maintenance cost
- Maintenance tax savings
- Net cash flow
- Net advantage to leasing:
- PV cost of leasing
- PV cost of owning
- NAL
- Download: https://solutionzip.com/downloads/chapter-8-problem-2-big-sky-hospital/
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