HCM301 CSU Global Week 5 Lease Financing and Capital Budgeting Problems
HCM301 CSU Global Week 5 Lease Financing and Capital Budgeting Problems
Please complete the three math problems below using excel.
UNDERSTANDING HEALTHCARE FINANCIAL MANAGEMENT |
||||||||
Chapter 8 — Lease Financing |
||||||||
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? |
||||||||
ANSWER |
||||||||
(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 |
9/1/14 |
UNDERSTANDING HEALTHCARE FINANCIAL MANAGEMENT |
|||||||
Chapter 11 — Capital Budgeting |
||||||||
PROBLEM 1 |
||||||||
Winston Clinic is evaluating a project that costs $52,125 and has expected net cash flows of $12,000 per |
||||||||
year for eight years. The first inflow occurs one year after the cost outflow, and the project has a cost of |
||||||||
capital of 12 percent. |
||||||||
a. What is the project’s payback? |
||||||||
b. What is the project’s NPV? Its IRR? |
||||||||
c. Is the project financially acceptable? Explain your answer. |
||||||||
ANSWER |
UNDERSTANDING HEALTHCARE FINANCIAL MANAGEMENT |
||||||||
Chapter 11 — Capital Budgeting |
||||||||
PROBLEM 3 |
||||||||
Capitol Health Plans, Inc., is evaluating two different methods for providing home health services to its |
||||||||
members. Both methods involve contracting out for services, and the health outcomes and revenues are |
||||||||
not affected by the method chosen. Therefore, the incremental cash flows for the decision are all outflows. |
||||||||
Here are the projected flows: |
||||||||
Year |
Method A |
Method B |
||||||
0 |
-$300,000 |
-$120,000 |
||||||
1 |
-$66,000 |
-$96,000 |
||||||
2 |
-$66,000 |
-$96,000 |
||||||
3 |
-$66,000 |
-$96,000 |
||||||
4 |
-$66,000 |
-$96,000 |
||||||
5 |
-$66,000 |
-$96,000 |
||||||
a. What is each alternative’s IRR? |
||||||||
b. If the cost of capital for both methods is 9 percent, which method should be chosen? Why? |
||||||||
ANSWER |