Agents Healthcare is negotiating a lease on a new MRI that would cost $156,000 i
ID: 2805416 • Letter: A
Question
Agents Healthcare is negotiating a lease on a new MRI that would cost $156,000 if Purchased. The equipment falls into MARCS 3 year property class, and it would be used for 4 years and then sold. It is estimated that the MRI could be sold for $28,500 after 4 years of use. A Maintenance contract on the equipment would cost $4,400 per year. Conversely, Agents could lease the equipment for 4 years for a lease payment of $46,000 per year, payable at the beginning of each year. Agents is in the 40% tax bracket, and would obtain a loan to purchase the MRI at the before tax interest rate of 8%. Calculate the Net Advantage of Leasing and recommended if Agents should purchase or lease the MRI.
Explanation / Answer
Ans 1 We will consider two conditions,
A. If he takes a loan for four years, with the interest rate which is tax adjusted and take it to 4 years and then seeing the pay off
B To see the lease payment and then how much it costs at the end
According to the first option the EMI Calculation is as follows
And the assumption for calculation of the purchase option is that revenue option is not included as there is nothing mentioned about this.
Ideally we should expect this to be positive considering the fact that there is no revenue.
If the each years expense is taken to the future value taking 4.8% only as the interest rate, then the value of this decision would be as follows.
The value will result in a negative cashflow as well.
Option B. If the machine is taken on a lease then the calculation is done in to ways. One taking the future value of each lease payment and second is just directly summing the amount of lease to see the total amount.
Total amount of expense
The total expense is 184,000 which is greater than the amount of the machine.
Ofcourse the revenue is needed to negate this but the expense side is greater than the amount of the machine
Option B to take the future value of the expense. This will again eed a revenue to negate the value is as follow
The future value is calculated taking 4.8% as the interest rate and end of the year.
The better option would be to buy the machine. Ofcourse the revenue side is not mentioned but it would be more advantageous because each year's expense in form of loan emi and maintenance is less than the lease payment made each year.
EMI Calculation Interest after tax Loan Amount Tenure in months EMI 4.80% 156000 48 $3,564.20