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.
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UNDERSTANDING HEALTHCARE FINANCIAL MANAGEMENT |
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Chapter 8 — Lease Financing |
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PROBLEM 2 |
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Big Sky Hospital plans to obtain a new MRI that costs $1.5 million and has an estimated four-year useful |
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life. It can obtain a bank loan for the entire amount and buy the MRI, or it can obtain a guideline lease for |
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the equipment. Assume that the following facts apply to the decision: |
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– The MRI falls into the three-year class for tax depreciation, so the MACRS allowances are 0.33, 0.45, |
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0.15, and 0.07 in Years 1 through 4, respectively. |
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– Estimated maintenance expenses are $75,000 payable at the beginning of each year whether the MRI is |
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leased or purchased. |
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– Big Sky’s marginal tax rate is 40 percent. |
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– The bank loan would have an interest rate of 15 percent. |
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– If leased, the lease payments would be $400,000 payable at the end of each of the next four years. |
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– The estimated residual (and salvage) value is $250,000. |
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a. What are the NAL and IRR of the lease? Interpret each value. |
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b. Assume now that the salvage value estimate is $300,000, but all other facts remain the same. What is |
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the new NAL? The new IRR? |
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ANSWER |
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(Hint: Use the following format as a guide.) |
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Year 0 |
Year 1 |
Year 2 |
Year 3 |
Year 4 |
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Cost of owning: |
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Net purchase price |
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Maintenance cost |
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Maintenance tax savings |
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Depreciation tax savings |
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Residual value |
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Tax on residual value |
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Net cash flow |
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Cost of leasing: |
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Lease payment |
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Lease tax savings |
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Maintenance cost |
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Maintenance tax savings |
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Net cash flow |
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Net advantage to leasing: |
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PV cost of leasing |
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PV cost of owning |
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NAL |
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9/1/14 |
UNDERSTANDING HEALTHCARE FINANCIAL MANAGEMENT |
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Chapter 11 — Capital Budgeting |
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PROBLEM 1 |
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Winston Clinic is evaluating a project that costs $52,125 and has expected net cash flows of $12,000 per |
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year for eight years. The first inflow occurs one year after the cost outflow, and the project has a cost of |
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capital of 12 percent. |
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a. What is the project’s payback? |
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b. What is the project’s NPV? Its IRR? |
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c. Is the project financially acceptable? Explain your answer. |
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ANSWER |
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UNDERSTANDING HEALTHCARE FINANCIAL MANAGEMENT |
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Chapter 11 — Capital Budgeting |
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PROBLEM 3 |
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Capitol Health Plans, Inc., is evaluating two different methods for providing home health services to its |
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members. Both methods involve contracting out for services, and the health outcomes and revenues are |
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not affected by the method chosen. Therefore, the incremental cash flows for the decision are all outflows. |
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Here are the projected flows: |
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Year |
Method A |
Method B |
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0 |
-$300,000 |
-$120,000 |
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1 |
-$66,000 |
-$96,000 |
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2 |
-$66,000 |
-$96,000 |
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3 |
-$66,000 |
-$96,000 |
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4 |
-$66,000 |
-$96,000 |
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5 |
-$66,000 |
-$96,000 |
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a. What is each alternative’s IRR? |
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b. If the cost of capital for both methods is 9 percent, which method should be chosen? Why? |
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ANSWER |
