What are the nal and irr of the lease-interpret each value

Assignment Help Financial Management

Reference no: EM131022834

Big Sky Hospital plans to obtain a new MRI that costs $2.5 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 lease 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 $175,000 payable at the beginning of each year whether the MRI is leased or purchased.

-Big Sky's marginal tax rate is 35 percent.

-The bank loan would have an interest rate of 15 percent.

-If leased, the lease (rental) payments would be $750,000 payable at the end of each of the next four years.

-The estimated residual (and salvage) value is $500,000.

a. What are the NAL and IRR of the lease? Interpret each value.

b. Should Big Sky Hospital lease or buy?

c. 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?

d. Did the new salvage value estimate change the decision to lease or buy?

Reference no: EM131022834

Questions Cloud

Profit for investment purposes : ‘The classical system of corporation tax is useful because it causes companies to retain more profit for investment purposes.' Discuss.

Find exchange rate in russian ruble and new zealand dollar : Fill in the missing values in the following table. Assume that the Big Mac is selling for $4.56 in the United States. Explain whether the U.S. dollar is overvalued or undervalued relative to each of the other currencies, and predict what will happ..

Explain the impacts of the us trade surpluses : Explain the impacts of Great Britain's trade surpluses on the Bank of England's balance sheet under the international gold standard.

Revaluation of an asset meets the ifrs : Examine whether a deferred tax liability arising from temporary differences on the revaluation of an asset meets the IFRS/US definition of a liability.

What are the nal and irr of the lease-interpret each value : Big Sky Hospital plans to obtain a new MRI that costs $2.5 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 lease the equipment. What are the NAL and IRR of the lease? Inter..

What is the opportunity cost of producing one more cake : What is the opportunity cost of producing one more cake if Joe is currently producing at combination A? What is the opportunity cost of producing one more cake if Joe is currently producing at combination B

Causes of deferred tax assets and deferred tax : Explain, using various examples, the causes of deferred tax assets and deferred tax liabilities under US accounting rules.

Degrees of prudence found in accounting : Compare the degrees of prudence found in accounting for employee benefits in Germany, Italy and the United States.

Statements is true of a bonds yield to maturity : Which one of the following statements is true of a bond’s yield to maturity?

User Account

All Pages