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Capital Budget Appraisal to Purchase New Equipment

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A competitive hospital maintains current equipment and purchases new in order to stay current with the latest technology. If you were evaluating the capital budget performance of a hospital what factors would you consider justifying taking on more debt to purchase new equipment for a surgical unit?

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When deciding for a capital expenditure there are two options for the hospital:
1. Purchase the new equipment when there is additional volume which justifies the expenditure. In this case there is sufficient cash flow to handle the additional debt service.

2. Purchase the new equipment at the beginning of new business year or quarter which is closest to the time when the equipment is actually required ...

Solution Summary

Factors which should be considered when evaluating option of debt financing are discussed.

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Should the land be included in the analysis? If so, how?

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A home identical to yours in your neighborhood, sold last week for $150,000. Your home has a $120,000 assumable, 8% mortgage (compounded annually) with 30 years remaining. An assumable mortgage is one that the new buyer can assume at the old terms, continuing to make payments at the original interest rate. The house that recently sold did not have an assumable mortgage; that is, the buyers had to finance the house at the current market rate of interest, which is 15%. What price should you ask for your home?

A third home, again identical to the one that sold for $150,000, is also being offered for sale. The only difference between this third home and the $150,000 home is the property taxes. The $150,000 home's property taxes are $3,000 per year, while the third home's property taxes are $2,000 per year. The differences in the property taxes are due to vagaries in how the property tax assessors assessed the taxes when the homes were built. In this tax jurisdiction, once annual taxes are set, they are fixed for the life of the home. Assuming the market rate of interest is still 15%, what should be the price of this third home?

Mortgage Department
Suppose you are the manager of a mortgage department at a savings bank. Under the state usury law, the maximum interest rate allowed for mortgages is 10% compounded annually.
a. If you granted a $50,000 mortgage at the maximum rate for 30 years, what would be the equal annual payments?
b. If the current market internal rate on similar mortgages is 12%, how much money does the bank lose by issuing the mortgage described in (a)?
c. The usury law does not prohibit banks from charging points. One point means that the borrower pays 1% of the $50,000 loan back to the lending institution at the inception of the loan. That is, if one point is charged, the repayments are computed as in (a), but the borrower receives only $49,500. How many points must the bank charge to earn 12% on the 10% loan?

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Year Depreciation Factor
1 0.3333
2 0.4445
3 0.1481
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