Financial information for the purpose of making viable management decisions.

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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.

 

Sample Solution

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

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