24 Jul WHAT IS THE NET ADVANTAGE TO LEASING (NAL)?
Lewis Health System Inc. has decided to acquire a new electronic health record system for its Richmo Show more 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 website. The equipment costs $1000000 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 $20000 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 $200000. 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 $260000 at the beginning of each year. Lewis 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 the: interest rate increases to 12 percent tax rate falls to 34 percent maintenance cost increases to $25000 per year residual value falls to $150000 system price increases to $1050000 e. Do the chnages in D make leasing more or leass attractive? I pretty much already have the answers to a b and c. I just need d and e. Thank you in advance. Show less
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