Financial information for the purpose of making viable management decisions.
Case Analysis: Leasing vs. Purchasing a CT Scan Unit for a Nonprofit Hospital
Introduction
Healthcare 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.
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.
Financial Overview
The following tables compare the financial costs of leasing and purchasing a CT scan unit:
Leasing
| Month | Lease Payment | Maintenance Cost | Total Expense |
|---|---|---|---|
| 1 | $26,000 | $0 | $26,000 |
| 2 | $26,000 | $0 | $26,000 |
| ... | ... | ... | ... |
| 60 | $26,000 | $0 | $26,000 |
| Total | $1,560,000 | $0 | $1,560,000 |
Purchasing
| Year | Principal Payment | Interest Payment | Maintenance Expense | Total Expense | PV Expense |
|---|---|---|---|---|---|
| 1 | $260,000 | $130,000 | $12,000 | $402,000 | $365,455 |
| 2 | $260,000 | $104,000 | $12,000 | $376,000 | $333,422 |
| 3 | $260,000 | $78,000 | $12,000 | $350,000 | $293,678 |
| 4 | $260,000 | $52,000 | $12,000 | $324,000 | $244,092 |
| 5 | $260,000 | $26,000 | $12,000 | $298,000 | $185,714 |
| Total | $1,300,000 | $390,000 | $60,000 | $1,750,000 | $1,422,361 |
Costs Associated with Leasing
The costs associated with leasing a CT scan unit include the following:
- Monthly lease payments: The hospital will make monthly lease payments to the leasing company for the duration of the lease term.
- Maintenance costs: The leasing company may be responsible for maintenance and repair costs, or the hospital may be responsible for some or all of these costs.
- Lease termination fee: If the hospital terminates the lease early, it may be required to pay a termination fee to the leasing company.
Costs Associated with Purchasing
The costs associated with purchasing a CT scan unit include the following:
- Purchase price: The hospital will pay the full purchase price of the unit upfront.
- Maintenance and repair costs: The hospital will be responsible for all maintenance and repair costs.
- Insurance: The hospital will need to purchase insurance to protect the unit from damage or theft.
- Taxes: The hospital may be subject to sales tax and other taxes on the purchase price of the unit.
Potential 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