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You work for HCA hospitals that are contemplating leasing a diagnostic scanner (leasing is a very common practice with expensive, high-tech equipment)
You work for HCA hospitals that are contemplating leasing a diagnostic scanner (leasing is a very common practice with expensive, high-tech equipment). The scanner costs €4,800,000, and it would be depreciated straight-line to zero over four years. Because of short cycle of the technological equipment the scanner will be completely valueless in four years. You can lease it for €1,430,000 per year for four years at a borrowing interest rate of 8% - ignore taxes for the purpose of this exercise.
Instructions:
a. Create a lease-versus-buy analysis. Calculate the NPV of leasing. Should you lease or buy? (10 points)
b. What are the differences between an operating lease and a financial lease? (10 points)
Expert Solution
Lease Cost:
Present Value of leasing = annual lease * PVAF (n, r)
Present Value of leasing = annual lease * PVAF (4, 8%)
Present Value of leasing = 1430000 * [(1-(1+8%)-4) / 8%]
Present Value of leasing = 1430000 * 3.3121
Present Value of leasing = $4,736,303
Buy Cost = $4,800,000
Decision: Lease cost is less than buy, hence leasing would be recommeded.
b) Difference between operating lease & finance lease:
(i) In finance lease ownsership transferred to lessee whereas in operating lease ownership retained by the lessor at the end of lease.
(ii) In finance lease lessee have the option to purchase the lease asset whereas there is no such option in operating lease.
(iii) Finance lease treated as asset whereas operating lease treated as expense.
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