Lease Versus Purchase

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. 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. Recommend a course of action and the implications that your recommendation may have for the organization.

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

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

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