Question

St. Martin's Hospital plans to purchase or lease a $2 million dollar CT scanner. If purchased, the CT scanner will be depreciated on a straight-line basis over five years, after which it will be worthless. If leased, the annual lease payments will be $500,000 per year for five years. St. Martin's borrowing cost is 8%, and its tax rate is 35%. If St. Martin purchases the CT scanner, what is the amount of the lease-equivalent loan?

Answer 1

The amount of the lease-equivalent loan for St. Martin's Hospital to purchase the CT scanner is $2,072,315.

Step-by-step explanation:

To calculate the lease-equivalent loan for the CT scanner, we need to compare the cost of purchasing the scanner to the cost of leasing it. If St. Martin's Hospital purchases the scanner for $2 million, it will be depreciated over five years.

The annual depreciation expense would be $400,000 ($2 million divided by 5 years).

Considering the tax rate of 35%, the annual tax savings from the depreciation would be $140,000 ($400,000 multiplied by 35%).

If the scanner is leased, the annual lease payments would be $500,000 for five years. To find the lease-equivalent loan amount, we need to determine the present value of these lease payments.

Given a borrowing cost of 8%, the present value of the lease payments would be $2,072,315.

Therefore, the amount of the lease-equivalent loan for St. Martin's Hospital to purchase the CT scanner would be $2,072,315.