Penn Medical Center, a for-profit entity, is considering the purchase of a 64-slice CT scanner. The cost of the scanner is $5 million. The scanner would be depreciatied over 10 years on a straight line basis to a zero salvage value. The tax rate is 40%. The financing options include either borrowing for the full cost of the scanner or leasing a scanner. The lease option is a 5-year lease with equal before-tax lease payments of $999,000 per year. The borrowing alternative is a 5-year loan covering the entire cost of the scanner at an interest rate of 5% which is also the implied lease rate. The after-tax cost of debt is 3%. a. Calculate the total cost to purchase the CT scanner over 5 years. b. Calculate the total cost to lease the CT sanner over 5 years. c. Should Penn Medical purchase or lease the CT scanner?. You will enter PURCHASE or LEASE for your answer.
Penn Medical Center, a for-profit entity, is considering the purchase of a 64-slice CT scanner. The cost of the scanner is $5 million. The scanner would be depreciatied over 10 years on a straight line basis to a zero salvage value. The tax rate is 40%. The financing options include either borrowing for the full cost of the scanner or leasing a scanner. The lease option is a 5-year lease with equal before-tax lease payments of $999,000 per year. The borrowing alternative is a 5-year loan covering the entire cost of the scanner at an interest rate of 5% which is also the implied lease rate. The after-tax cost of debt is 3%.
a. Calculate the total cost to purchase the CT scanner over 5 years.
b. Calculate the total cost to lease the CT sanner over 5 years.
c. Should Penn Medical purchase or lease the CT scanner?. You will enter PURCHASE or LEASE for your answer.
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