Lease Versus Purchase
Full Answer Section
- 
- No ownership of the equipment at the end of the lease term
 
- Pros:
- Lower total cost over the life of the equipment
- Ownership of the equipment at the end of the lease term
 
- Cons:
- Higher upfront cost
- Risk of obsolescence
- Responsible for maintenance costs
 
| Month | Principal Payment | Interest Payment | Maintenance Expense | Total Expense | PV Expense | 
| 1 | $0 | $2,600 | $0 | $2,600 | $2,500 | 
| 2 | $0 | $2,600 | $0 | $2,600 | $2,500 | 
| 3 | $0 | $2,600 | $0 | $2,600 | $2,500 | 
| ... | ... | ... | ... | ... | ... | 
| 59 | $0 | $2,600 | $0 | $2,600 | $2,500 | 
| 60 | $0 | $2,600 | $0 | $2,600 | $2,500 | 
| Month | Principal Payment | Interest Payment | Maintenance Expense | Total Expense | PV Expense | 
| 1 | $260,000 | $13,000 | $0 | $273,000 | $250,000 | 
| 2 | $260,000 | $10,400 | $12,000 | $282,400 | $250,000 | 
| 3 | $260,000 | $7,800 | $12,000 | $279,800 | $250,000 | 
| ... | ... | ... | ... | ... | ... | 
| 59 | $260,000 | $1,600 | $12,000 | $273,600 | $250,000 | 
| 60 | $260,000 | $0 | $12,000 | $272,000 | $250,000 | 
- The lease payment includes the principal payment, interest payment, and maintenance expense.
- The principal payment is the amount of the lease payment that goes towards reducing the outstanding balance of the lease.
- The interest payment is the amount of the lease payment that goes towards paying interest on the outstanding balance of the lease.
- The maintenance expense is the amount of the lease payment that goes towards covering the cost of maintenance for the CT scanner.
- The purchase price of the CT scanner is the upfront cost of purchasing the equipment.
- The interest payment is the amount of interest that the hospital will pay on the loan that it takes out to purchase the CT scanner.
- The maintenance expense is the cost of maintaining the CT scanner over its useful life.
- Lease payments are typically deductible as business expenses.
- If the lease is a capital lease, the hospital may be able to depreciate the CT scanner.
- The purchase price of the CT scanner can be depreciated over its useful life.
- The interest payments on the loan used to purchase the CT scanner are typically deductible as business expenses.
Sample Solution
Purchasing vs. Leasing a CT Scanner for a Nonprofit Hospital
Comparison of Leasing and Purchasing
Leasing
- Pros:
- Lower upfront cost
- No risk of obsolescence
- Maintenance costs are typically included in the lease payment
 
- Cons:
- Higher total cost over the life of the equipment