Chapter 8

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Complete the following problems in Chapter 8

Chapter 8

Big Sky Hospital plans to obtain a new MRI that costs \$1.5 million and has an estimated four-year useful life. It can obtain a bank loan for the entire amount and buy the MRI, or it can obtain a guideline lease for the equipment. Assume that the following facts apply to the decision:

– The MRI falls into the three-year class for tax depreciation, so the MACRS allowances are 0.33, 0.45, 0.15, and 0.07 in Years 1 through 4, respectively.

– Estimated maintenance expenses are \$75,000 payable at the beginning of each year whether the MRI is leased or purchased.

– Big Sky’s marginal tax rate is 40 percent.

– The bank loan would have an interest rate of 15 percent.

– If leased, the lease payments would be \$400,000 payable at the end of each of the next four years.

– The estimated residual (and salvage) value is \$250,000.

a. What are the NAL and IRR of the lease? Interpret each value.

b. Assume now that the salvage value estimate is \$300,000, but all other facts remain the same. What is the new NAL? The new IRR?