Scribd
Upload
4 views2 pages

Lease vs. Purchase Analysis for Cancer Center

The document discusses the risks and benefits of an annual lease versus a per procedure lease for a cancer hospital. The author calculates that the per procedure lease would generate more profit for the hospital, ranging from $490,000 to $390,000 depending on the number of procedures, while the annual lease would only result in $25,000 in profit. However, the per procedure lease also carries more risk if there are no procedures for a long time. In a later question, discounting cash flows at a lower 5% rate when tax-exempt debt is available makes owning appear more attractive than leasing. Applying a higher 13% discount rate to the expected residual value to account for increased risk makes leasing appear more attractive to

Uploaded by

ShafiqUr Rehman
Copyright
© All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
4 views2 pages

Lease vs. Purchase Analysis for Cancer Center

The document discusses the risks and benefits of an annual lease versus a per procedure lease for a cancer hospital. The author calculates that the per procedure lease would generate more profit for the hospital, ranging from $490,000 to $390,000 depending on the number of procedures, while the annual lease would only result in $25,000 in profit. However, the per procedure lease also carries more risk if there are no procedures for a long time. In a later question, discounting cash flows at a lower 5% rate when tax-exempt debt is available makes owning appear more attractive than leasing. Applying a higher 13% discount rate to the expected residual value to account for increased risk makes leasing appear more attractive to

Uploaded by

ShafiqUr Rehman
Copyright
© All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd

Question 4 Notes.

Respected professor, in question 4 we need to evaluated the risk between the annual lease

procedure or per procedure lease. From the given case I calculated the risk between the annual

lease procedure and per procedure lease. As I shown in the graph the per procedure lease is more

beneficial for cancer hospital because it will generate more profits for the center. There is also

some risk involved because if there is no procedure for long time it will not be beneficial for the

center. The per procedure lease payment is $7000 and probability of getting procedure is

between 70-130. When we multiple the 7000 with 70 we will get $490,000 as result if center try

to implement the per procedure lease system and revenue will also very . while on other hand the

annual lease is fixed it will be 675,000 and in this way center will only get $25000 profit while in

per procedure lease process the profits are different an will be high as much as $390,000. So I

plot both graphs in solution to make my point clear.

Question 5th

As expected, the availability of low-cost, tax-exempt debt increases the attractiveness of owning

relative to leasing. At a residual value of $1,125,000 and a 5 percent discount rate for all cash

flows, the Center's NAL is -$66,408. the only way to obtain consistency between the NAL and

IRR is to now discount the cash flows at 5 percent and hence change the discount rate as

financing opportunities change even though such opportunities do not change the riskiness of the

cash flows being discounted.

Question 6

To adjust for the increased risk associated with the residual value, i applied an 8% + 5% = 13%

discount rate to the $1,125,000 expected residual value. The incorporation of difference risk

increases the base case NAL from $116,261 to $253,186. Because residual value risk is borne by
the lessor, the recognition of increased residual value risk makes leasing much more attractive to

the Center than before.

You might also like