Finance-Purchase versus lease. Lower Merion Medical Center

| January 30, 2017

Question
Purchase versus lease.Lower Merion Medical Center, a taxpaying entity, has made the decision to purchase a new laser surgical device.The device costs $1,200,000 and will be depreciated on a straight-line basis over 5 years to a zero salvage value.Lower Merion could borrow the full amount of a 6 percent rate for 5 years, which is also the implied borrowing rate for the lease. The after-tax cost of debt equals 4 percent.Alternatively, it could lease the device for 5 years.The before-tax lease payments per year would be $350,000.The tax rate for this center is 40 percent.From a financial perspective, should Lower Merion lease this surgical device or borrow the money to purchase it?

This needs to be done in excel!

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