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.
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
Which Option is Better?
The best option for the hospital will depend on its specific circumstances. If the hospital needs to conserve cash upfront, then leasing may be the better option. However, if the hospital is able to afford the upfront cost, then purchasing may be the better option in the long run, as it will give the hospital ownership of the equipment and allow it to depreciate the purchase price over its useful life.
Calculating the Figures
Here is a table calculating the figures relative to the principal payment, interest payment, maintenance expense, total expense, and PV expense for both leasing and purchasing the CT scan unit:
| Factor |
Leasing |
Purchasing |
| Principal payment |
$26,000 per month for 60 months |
$1,300,000 - $130,000 trade-in value = $1,170,000 |
| Interest payment |
$0 |
$1,170,000 * 10% = $117,000 |
| Maintenance expense |
$12,000 per year for 5 years = $60,000 |
$12,000 per year for 5 years = $60,000 |
| Total expense |
$26,000 * 60 months + $60,000 = $1,620,000 |
$1,300,000 + $117,000 + $60,000 = $1,477,000 |
| PV expense |
Assuming a discount rate of 10%, the PV expense of leasing the equipment is $1,469,800. The PV expense of purchasing the equipment is $1,363,600. |
|
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Costs Associated with Leasing the Equipment
The costs associated with leasing the equipment include:
- The monthly lease payments
- Any additional fees associated with the lease, such as a termination fee or a security deposit
- The cost of insurance (if required by the lease agreement)
Costs Associated with Purchasing the Equipment
The costs associated with purchasing the equipment include:
- The purchase price of the equipment
- The cost of delivery and installation
- The cost of training staff on how to use the equipment
- The cost of maintenance and repairs
- The cost of insurance
Tax Implications
Leasing: Lease payments are generally deductible as a business expense for nonprofit organizations.
Purchasing: The purchase price of the equipment can be depreciated over its useful life for nonprofit organizations.
Recommendation
Based on the information provided, I recommend that the hospital purchase the CT scan unit. While the upfront cost is higher, the hospital will save money in the long run, as it will own the equipment and be able to depreciate the purchase price over its useful life.
Implications of My Recommendation
If the hospital decides to purchase the CT scan unit, it will need to budget for the upfront cost of the equipment. The hospital will also need to develop a plan for maintaining and repairing the equipment. Additionally, the hospital will need to train staff on how to use the equipment.
Overall, I believe that purchasing the CT scan unit is the best option for the hospital. It is a long-term investment that will save the hospital money in the long run.