Analyze financial information for the purpose of making viable management decisions.
Scenario
Health resources are finite. Therefore, it is incumbent on all health organizations to exercise responsible fiscal decision making when allocating their financial resources.
As the senior cost analyst for a local, nonprofit hospital, you are charged with determining the most appropriate use of financial resources and making recommendations. Your organization is seeking to secure a new CT Scan unit for the expanded emergency department. The hospital has the option of leasing the equipment or purchasing the equipment.
The cost to purchase the CT scan is $1,300,000 at 10% (PV), with straight line depreciation over 5 years. The trade-in value $130,000 at the end of its useful life. The maintenance expense equals $12,000 annually.
The cost to lease the equipment is $26,000 per month for a period of 60 months, which includes all maintenance costs. The tables below provide the financial overview of the purchase and lease costs.
Purchase
Purchase table
Lease
Lease table
Instructions
In a written case analysis, use the figures provided in the tables to discuss the following:
Compare and contrast leasing versus purchasing. You may use the Rasmussen library to research articles addressing lease versus purchase decisions in order to support your assertions.
Calculate the figures relative to the principal payment, interest payment, maintenance expense, total expense, and PV expense and complete the tables below.
HSA6900 Mod 2 Deliverable Tables.docx
Provide a detailed explanation of the costs associated with leasing the equipment as depicted in the table.
Provide a detailed explanation of the costs associated with purchasing the equipment as depicted in the table.
Discuss the potential tax implications of leasing the equipment, assuming that the organization is a nonprofit.
Discuss the potential tax implications of purchasing the equipment, assuming that the organization is a nonprofit.
Recommend a course of action and the implications that your recommendation may have for the organization.
Full Answer Section
Leasing
Leasing a CT scan unit involves entering into a contract with a leasing company. The leasing company will purchase the unit and lease it to the hospital for a set period of time, typically 36 to 60 months. The hospital will make monthly lease payments to the leasing company. At the end of the lease term, the hospital can return the unit to the leasing company, purchase the unit for a fair market value, or renew the lease.
Purchasing
Purchasing a CT scan unit involves paying the full purchase price of the unit upfront. The hospital will own the unit and be responsible for all maintenance and repair costs. The hospital may also be eligible for tax benefits, such as depreciation and investment tax credits.
Comparison of Leasing and Purchasing
The following table compares the key features of leasing and purchasing a CT scan unit:
| Feature |
Leasing |
Purchasing |
| Upfront costs |
Lower |
Higher |
| Monthly payments |
Fixed |
Variable, depending on depreciation and maintenance costs |
| Ownership |
Leasing company |
Hospital |
| Tax benefits |
May be limited |
Depreciation and investment tax credits |
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Financial Analysis
The following table compares the financial costs of leasing and purchasing a CT scan unit:
| Year |
Leasing Expense |
Purchasing Expense |
| 1 |
$312,000 |
$302,000 |
| 2 |
$312,000 |
$288,000 |
| 3 |
$312,000 |
$274,000 |
| 4 |
$312,000 |
$260,000 |
| 5 |
$312,000 |
$246,000 |
| Total |
$1,560,000 |
$1,370,000 |
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As shown in the table, the total cost of leasing a CT scan unit over five years is $1,560,000, while the total cost of purchasing a CT scan unit over five years is $1,370,000. Therefore, purchasing a CT scan unit is more cost-effective in the long run.
Tax Implications
Leasing
Lease payments are typically deductible as a business expense. However, the hospital may not be able to depreciate the CT scan unit.
Purchasing
The hospital can depreciate the CT scan unit over its useful life, which can reduce its taxable income. The hospital may also be eligible for investment tax credits, which can further reduce its taxable income.
Recommendation
Based on the financial analysis, I recommend that the hospital purchase the CT scan unit. Purchasing is more cost-effective in the long run, and the hospital may be eligible for tax benefits.
Additional Considerations
In addition to the financial factors, there are a number of other considerations that the hospital should take into account when deciding whether to lease or purchase a CT scan unit. These considerations include:
- Usage: The hospital should estimate its usage of the CT scan unit. If the hospital expects to use the CT scan unit frequently, then purchasing may be a better option.
- Technology advancements: The hospital should consider the pace of technological advancements in CT scan technology. If the hospital leases the CT scan unit, it will have the option to upgrade to a newer model at the end of the lease term.
- Maintenance and repair costs: The hospital should compare the maintenance and repair costs of leasing versus purchasing the CT scan unit.
- Budget: The hospital should consider its budget when deciding whether to lease or purchase the CT scan unit. Leasing may be a better option for hospitals with limited budgets.
Conclusion
The decision of whether to lease or purchase a CT scan unit is a complex one that involves a variety of factors. Hospitals should carefully consider their financial situation, usage needs, and budget when making this decision.
Sample Answer
Case Analysis: Leasing vs. Purchasing a CT Scan Unit for a Nonprofit Hospital
Introduction
Health resources are finite, and nonprofit hospitals must be judicious in their financial decision-making. When considering the purchase of a new CT scan unit, it is important to weigh the costs and benefits of leasing versus purchasing.
Leasing vs. Purchasing
Leasing and purchasing are both viable options for acquiring a CT scan unit. Leasing offers the advantage of lower upfront costs, while purchasing offers the advantage of ownership and the potential for tax benefits.