Lease Versus Purchase
Analyze financial information for the purpose of making viable management decisions.
Scenario
Health resources are finite. Therefore, it is incumbent on all health organizations to exercise responsible fiscal decision making when allocating their financial resources.
As the senior cost analyst for a local, nonprofit hospital, you are charged with determining the most appropriate use of financial resources and making recommendations. Your organization is seeking to secure a new CT Scan unit for the expanded emergency department. The hospital has the option of leasing the equipment or purchasing the equipment.
The cost to purchase the CT scan is $1,300,000 at 10% (PV), with straight line depreciation over 5 years. The trade-in value $130,000 at the end of its useful life. The maintenance expense equals $12,000 annually.
The cost to lease the equipment is $26,000 per month for a period of 60 months, which includes all maintenance costs. The tables below provide the financial overview of the purchase and lease costs.
Purchase
Purchase table
Lease
Lease table
Instructions
In a written case analysis, use the figures provided in the tables to discuss the following:
Compare and contrast leasing versus purchasing. You may use the Rasmussen library to research articles addressing lease versus purchase decisions in order to support your assertions.
Calculate the figures relative to the principal payment, interest payment, maintenance expense, total expense, and PV expense and complete the tables below.
HSA6900 Mod 2 Deliverable Tables.docx
Provide a detailed explanation of the costs associated with leasing the equipment as depicted in the table.
Provide a detailed explanation of the costs associated with purchasing the equipment as depicted in the table.
Discuss the potential tax implications of leasing the equipment, assuming that the organization is a nonprofit.
Discuss the potential tax implications of purchasing the equipment, assuming that the organization is a nonprofit.
Sample Solution
Leasing and purchasing are two different ways to acquire equipment. Leasing is a short-term agreement in which the lessee (user) pays the lessor (owner) a monthly fee for the use of the equipment. Purchasing is a long-term agreement in which the lessee acquires the equipment outright.
There are a number of factors to consider when deciding whether to lease or purchase equipment, including the following:
- Upfront costs: Leasing typically has lower upfront costs than purchasing. This is because the lessee does not have to pay the full cost of the equipment upfront.
- Monthly payments: Leasing typically has lower monthly payments than purchasing. This is because the lessee is only paying for the depreciation of the equipment over the lease term.
Full Answer Section
- Ownership: At the end of the lease term, the lessee can return the equipment to the lessor or purchase it at fair market value. With purchasing, the lessee owns the equipment outright at the end of the lease term.
- Maintenance: Leasing typically includes maintenance costs in the monthly payment. With purchasing, the lessee is responsible for all maintenance costs.
- Tax implications: Leasing and purchasing have different tax implications. Leasing is generally considered to be an operating expense, which is deductible from taxable income. Purchasing is considered to be a capital asset, which is depreciated over time.
| Year | Principal Payment | Interest Payment | Maintenance Expense | Total Expense | PV Expense |
| 1 | $260,000 | $130,000 | $12,000 | $402,000 | $402,000 |
| 2 | $260,000 | $104,000 | $12,000 | $376,000 | $338,709 |
| 3 | $260,000 | $78,000 | $12,000 | $350,000 | $278,676 |
| 4 | $260,000 | $52,000 | $12,000 | $324,000 | $223,388 |
| 5 | $260,000 | $26,000 | $12,000 | $298,000 | $172,332 |
| Total | $1,300,000 | $490,000 | $60,000 | $1,850,000 | $1,415,105 |
| Year | Lease Payment | Maintenance Expense | Total Expense | PV Expense |
| 1 | $26,000 | $0 | $26,000 | $26,000 |
| 2 | $26,000 | $0 | $26,000 | $23,646 |
| 3 | $26,000 | $0 | $26,000 | $21,436 |
| 4 | $26,000 | $0 | $26,000 | $19,388 |
| 5 | $26,000 | $0 | $26,000 | $17,475 |
| Total | $130,000 | $0 | $130,000 | $108,381 |