Question

The Morton Clinic needs to replace its radiology equipment. The vendor will sell the need equipment for $100,000 or lease it for five years for $24,000 pe year. Morton is a non-profit organization that pays 30% ax. The equipment will b placed into service on the first day of the year, and have zero salvage value at the end of year 5. Calculate the cost of purchasing and leasing using a 4% present value. Should Morton purchase or lease?

Answer 1

The cost of purchasing is $62,162.44, which is lower than the cost of leasing ($95,746.40).

To determine whether Morton Clinic should purchase or lease the radiology equipment, let's calculate the costs of both options.

Cost of Purchasing:

Given:

- Purchase Price: $100,000

- Tax Rate: 30%

- Present Value Factor at 4% for 5 years (from tables or formulas): 0.8227

`\[ \text{Cost of Purchasing} = \text{Purchase Price} * (1 - \text{Tax Rate}) * \text{Present Value Factor} \]`

`\[ \text{Cost of Purchasing} = $100,000 * (1 - 0.30) * 0.8227 \]`

`\[ \text{Cost of Purchasing} = $62,162.44 \]`

Cost of Leasing:

Given:

- Lease Payment per year: $24,000

- Present Value Factor at 4% for 5 years (from tables or formulas): 3.546

`\[ \text{Cost of Leasing} = \text{Lease Payment per year} * \text{Present Value Factor} \]`

`\[ \text{Cost of Leasing} = $24,000 * 3.546 \]`

`\[ \text{Cost of Leasing} = $95,746.40 \]`

Therefore, based on the calculations, it is more cost-effective for Morton Clinic to purchase the radiology equipment as the cost of purchasing is $62,162.44, which is lower than the cost of leasing ($95,746.40).

Answer 2

To determine whether Morton Clinic should purchase or lease the radiology equipment, we need to calculate the costs of both options. The cost of purchasing the equipment is $100,000, but after considering the present value and after-tax cost, it amounts to $62,162.44. On the other hand, the cost of leasing the equipment, after calculating the present value, is $95,746.40. Therefore, it is more cost-effective for Morton Clinic to purchase the radiology equipment.

Step-by-step explanation:

To determine whether Morton Clinic should purchase or lease the radiology equipment, we need to calculate the costs of both options. Let's start with the purchase option:

1. The cost of purchasing the equipment is $100,000.
2. We need to calculate the present value of $100,000 at a 4% discount rate over a 5-year period. Using the present value formula, PV = FV / (1+r)ⁿ, where FV is the future value, r is the discount rate, and n is the number of periods, the present value comes out to be $88,803.48.
3. Since Morton is a non-profit organization and pays 30% tax, the after-tax cost of purchasing is $88,803.48 × (1-0.30) = $62,162.44.

Now, let's calculate the lease option:

• The annual lease cost is $24,000.

• We need to calculate the present value of the lease payments over a 5-year period. Using the present value formula, the present value of the lease option comes out to be $95,746.40.

Based on the calculations, the cost of purchasing is $62,162.44, while the cost of leasing is $95,746.40. Therefore, it is more cost-effective for Morton Clinic to purchase the radiology equipment rather than leasing it.