HCM301 CSU Global Week 5 Lease Financing and Capital Budgeting Problems Please complete the three math problems below using excel. UNDERSTANDING HEALTH

HCM301 CSU Global Week 5 Lease Financing and Capital Budgeting Problems Please complete the three math problems below using excel.

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

Year 1

Year 2

Year 3

Year 4

Cost of owning:

Net purchase price

Maintenance cost

Maintenance tax savings

Depreciation tax savings

Residual value

Tax on residual value

Net cash flow

Cost of leasing:

Lease payment

Lease tax savings

Maintenance cost

Maintenance tax savings

Net cash flow

Net advantage to leasing:

PV cost of leasing

PV cost of owning

NAL

9/1/14

UNDERSTANDING HEALTHCARE FINANCIAL MANAGEMENT

Chapter 11 — Capital Budgeting

PROBLEM 1

Winston Clinic is evaluating a project that costs $52,125 and has expected net cash flows of $12,000 per

year for eight years. The first inflow occurs one year after the cost outflow, and the project has a cost of

capital of 12 percent.

a. What is the project’s payback?

b. What is the project’s NPV? Its IRR?

c. Is the project financially acceptable? Explain your answer.

ANSWER

UNDERSTANDING HEALTHCARE FINANCIAL MANAGEMENT

Chapter 11 — Capital Budgeting

PROBLEM 3

Capitol Health Plans, Inc., is evaluating two different methods for providing home health services to its

members. Both methods involve contracting out for services, and the health outcomes and revenues are

not affected by the method chosen. Therefore, the incremental cash flows for the decision are all outflows.

Here are the projected flows:

Year

Method A

Method B

0

-$300,000

-$120,000

1

-$66,000

-$96,000

2

-$66,000

-$96,000

3

-$66,000

-$96,000

4

-$66,000

-$96,000

5

-$66,000

-$96,000

a. What is each alternative’s IRR?

b. If the cost of capital for both methods is 9 percent, which method should be chosen? Why?

ANSWER