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Complete the following practice exercises from your textbook, Gapenski & Pink (2015), and submit the completed document or Excel file as requested in the assignment.
Explanation & Answer
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9/1/2014
UNDERSTANDING HEALTHCARE FINANCIAL MANAGEMENT
Chapter 8 -- Lease Financing
PROBLEM 1
Suncoast Healthcare is planning to acquire a new X-ray machine that costs $200,000. The business can
either lease the machine using an operating lease or buy it using a loan from a local bank. Suncoast's
balance sheet prior to acquiring the machine is as follows:
Current assets
Net fixed assets
Total assets
$100,000
$900,000
$1,000,000
Debt
Equity
Total claims
$400,000
$600,000
$1,000,000
a. What is Suncoast's current debt ratio?
b. What would the new debt ratio be if the machine were leased? If it were purchased?
c. Is the financial risk of the business different under the two acquisition alternatives?
ANSWER
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
Cost of owning:
Net purchase price
Maintenance cost
Maintenance tax savings
Depreciation tax savings
Residual value
Tax ...
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