Reference no: EM131315804
Lewis Health System Inc. has decided to acquire a new electronic health record system for its Richmond hospital. The system receives clinical data and other patient information from nursing units and other patient care areas, then either displays the information on a screen or stores it for later retrieval by physicians. The system also permits patients to call up their health record on Lewis's website.
The equipment costs $1,000,000, and, if it were purchased, Lewis could obtain a term loan for the full purchase price at a 10 percent interest rate. Although the equipment has a six-year useful life, it is classified as a special-purpose computer, so it falls into the MACRS three-year class. If the system were purchased, a four-year maintenance contract could be obtained at a cost of $20,000 per year, payable at the beginning of each year. The equipment would be sold after four years, and the best estimate of its residual value at that time is $200,000. However, since real-time display system technology is changing rapidly, the actual residual value is uncertain.
As an alternative to the borrow-and-buy plan, the equipment manufacturer informed Lewis that Consolidated Leasing would be willing to write a four-year guideline lease on the equipment, including maintenance, for payments of $260,000 at the beginning of each year. Lewis's marginal federal-plus-state tax rate is 40 percent. You have been asked to analyze the lease-versus-purchase decision, and in the process to answer the following questions:
a. What is the present value cost of owning the equipment?
b. What is the present value cost of leasing the equipment?
c. What is the net advantage to leasing (NAL)?
d. Answer these questions one at a time to see the effect of the change on NAL. That is, starting with the original numbers you used for questions a. and b., what is the NAL if:
- Interest rate increases to 12 percent
- The tax rate falls to 34 percent
- Maintenance cost increases to $25,000 per year
- Residual value falls to $150,000
- The system price increases to $1,050,000
e. Do the changes in d. make leasing more or less attractive? Explain.
|
Determine the current year end prices of both bonds
: You currently hold a 10 year, 7% coupon bond priced to yield 8%. As a swap candidate you are considering a 10 year, 8% coupon bond priced to yield 9%. Assume a reinvestment at 9%, semiannual compounding, and a year workout period. Determine the curr..
|
|
Discount rate is important component in net present value
: The social discount rate is an important component in net present value (NPV) calculations for public policies related to stock externalities, but economists do not agree on which value to use for this rate. Suppose a recent study reports that the NP..
|
|
What is the current value of call option with a strike price
: You invested $5,000 in a mutual fund 27 months ago when the NAV of the fund was $30.00. You have not acquired or sold any shares since that time. Today, the NAV is $28.40. How much money will you receive if you redeem your shares today? A stock with ..
|
|
Deposit ?into an account
: You can deposit ?$14,000 into an account paying 15?% annual interest either today or exactly 5 years from today. How much better off will you be at the end of 20 years if you decide to make the initial deposit today rather than 5 years from? today? I..
|
|
What is the present value cost of leasing the equipment
: Lewis Health System Inc. has decided to acquire a new electronic health record system for its Richmond hospital. The system receives clinical data and other patient information from nursing units and other patient care areas, then either displays the..
|
|
Journal entries to capture the swap contract for the first
: A New Zealand company has a foreign denominated asset in United States dollars worth US$600,000 on the 1 July 2016. The US debtor is due to repay this debt to the New Zealand company over the next 12 months. Prepare the journal entries to capture the..
|
|
Using normal distribution and riskmetrics
: Download a market index (Pt denotes the index at day t) in 2013-2014 of the Hong Kong. US or UK markets. Define the return of investment by Rt = (P_t - P_t-1)/P_t-1. Using normal distribution and RiskMetrics, obtain 5% and 1% daily VaR in 2013-2014. ..
|
|
How much would you offer for this annuity
: Suppose you are examining an asset that promised to pay $500 at the end of each of the next 5 years. If you are looking for 10% per annum interest on your money, how much would you offer for this annuity?
|
|
Part-time consulting work
: Eric borrowed money last year to buy a new car for his part-time consulting work. The loan is a 3-year loan with 36 monthly payments. Due to his bad credit history, the loan he got is with a 12% annual interest rate compounded monthly. how much does ..
|