QUESTION 6 Lower Merion Medical Center, a taxpaying entity, has made the decision to purchase a new laser surgical device. The device costs $1,200,000 and will be depreciated on a straight-line basis over 5 years to a $0 salvage value. Lower Merion could borrow the full amount at a 6% rate for 5 years, which is also the implied borrowing rate for the lease. The after-tax cost of debt equals 4%. Alternatively, it could lease the device for 5 years. The before-tax lease payments per year would be $350,000. The tax rate for this center is 40%.What is the total cost of the purchase alternative?What is the total cost of the leasing alternative?Should New Health Hospital System lease or borrow the money to purchase the hospital? You will enter LEASE or PURCHASE as your answer.

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Financial Management: Theory & Practice

16th Edition

ISBN:9781337909730

Author:Brigham

Publisher:Brigham

Chapter19: Lease Financing

Section: Chapter Questions

Problem 6P: Big Sky Mining Company must install 1.5 million of new machinery in its Nevada mine. It can obtain a...

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QUESTION 6

Lower Merion Medical Center, a taxpaying entity, has made the decision to purchase a new laser surgical device. The device costs $1,200,000 and will be depreciated on a straight-line basis over 5 years to a $0 salvage value. Lower Merion could borrow the full amount at a 6% rate for 5 years, which is also the implied borrowing rate for the lease. The after-tax cost of debt equals 4%. Alternatively, it could lease the device for 5 years. The before-tax lease payments per year would be $350,000. The tax rate for this center is 40%.
1. What is the total cost of the purchase alternative?
2. What is the total cost of the leasing alternative?
3. Should New Health Hospital System lease or borrow the money to purchase the hospital? You will enter LEASE or PURCHASE as your answer.

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