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financing option

United Hospital has received a leasing proposal from Leasing, Inc., for a Siemens cardiac catheterization unit. The terms are:

â?¢ Five-year lease
â?¢ Annual payments of $200,000 payable one year in advance
â?¢ Payment of property tax estimated to be $23,000 annually
â?¢ Renewal at end of year 5 at fair market value

Alternatively, United Hospital can buy the catheterization unit for $725,000. This purchase would require United Hospital to debt-finance this equipment. It anticipates a bank loan with an initial down payment of $125,000 and a three-year term loan at 16 percent with equal principal payments. The residual value of the equipment at year 5 is estimated to be $225,000. The lease is treated as an operating lease. Depreciation is calculated on a straight-line basis. Assuming a discount rate of 14 percent, what financing option should United Hospital select? Assume that there is no reimbursement of capital costs.

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Solution Summary

What financing option should United Hospital select?