Lease Versus Purchase

Full Answer Section

     

• • No ownership of the equipment at the end of the lease term

Purchasing

• 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

Financial Analysis Lease

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

drive_spreadsheetExport to Sheets Total lease cost: $156,000 Purchase

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

drive_spreadsheetExport to Sheets Total purchase cost: $1,431,800 Costs Associated with Leasing

• 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.

Costs Associated with Purchasing

• 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.

Tax Implications Leasing

• 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.

Purchasing

• 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.

Recommendation Based on the financial analysis, it is more cost-effective for the hospital to purchase the CT scanner. The total purchase cost, including interest and maintenance expenses, is still lower than the total lease cost. Additionally, the hospital will own the CT scanner at the end of its useful life, which gives the hospital more flexibility. Implications of Recommendation If the hospital chooses to purchase the CT scanner, it will need to have the upfront capital to make the purchase. Additionally, the hospital will be responsible for the maintenance costs of the CT  

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