Question 15133

11 pages
1 downs
30 views

Extension: PDF

Please download to get full document.

View again

of 11
All materials on our website are shared by users. If you have any questions about copyright issues, please report us to resolve them. We are always happy to assist you.
Share
Description
Hire A Tutor For Your Homework www.helpingtutors.com Alternatevely contact me for it's solution at flat rate of $20 licservernoida@gmail.comI need help in case 17 (…
Transcript
Hire A Tutor For Your Homework www.helpingtutors.com Alternatevely contact me for it's solution at flat rate of $20 licservernoida@gmail.comI need help in case 17 ( question 1,2,3,4,6)attached is the case details with questions and the excel sheetThanks CASE 17 10/15/2015 Student Version Copyright 2014 Health Administration Press SEATTLE CANCER CENTER Leasing Decisions This case illustrates the lease versus purchase decision from the standpoints of both the lessee and the lessor. The model calculates the NAL (or NPV) and IRR of the lease for both parties on the basis of relevant input data. The invoice price and lease rental payments must be the same for both parties, but the other input variables may be different for each party. The model also examines the differential profitability to the lessee between conventional and per procedure leases. The model consists of a complete base case analysis—no changes need to be made to the existing MODEL-GENERATED DATA section. However, all values in the student version INPUT DATA section have been replaced with zeros. Thus, students must determine the appropriate input values and enter them into the model. These cells are colored red. When this is done, any error cells will be corrected and the base case solution will appear. Note that the model does not contain any risk analyses, so students will have to create their own if required by the case. Furthermore, students must create their own graphics (charts) as needed to present their results. Both instructor and student versions contains a sheet (Figure 1) that plots lessee's NAL, lessor's NPV, and total contract value versus the size of the lease payment. INPUT DATA: KEY OUTPUT: General Data: Lessee: Invoice price Annual lease payment Net revenue per procedure Per procedure lease payment $3,000,000 $675,000 $10,000 $7,000 For Lessee Only: Maintenance contract cost Loan interest (discount) rate Estimated residual value Residual value discount rate Tax rate $100,000 8.0% $1,125,000 8.0% 0.0% For Lessor Only: NAL IRR $116,261 6.0% Unleveraged lease: NPV IRR $99,368 6.2% Leveraged lease: NPVIRR $67,305 8.8% Lessor: Per Procedure Versus Annual Lease: (Volume = procedures annually) Maintenance contract Opportunity cost rate Estimated residual value Residual value discount rate Tax rate Leveraged lease inputs: Amount borrowed Interest rate $100,000 8.0% $1,500,000 8.0% 40.0% Per procedure lease Annual lease Difference Profit $300,000 325,000 ($25,000) $1,500,000 9.0% MODEL-GENERATED DATA: MACRS Depreciation Table: Year 1 2 3 4 5 6 MACRS Rate 0.20 0.32 0.19 0.12 0.11 0.06 Basis $3,000,000 3,000,000 3,000,000 3,000,000 3,000,000 3,000,000 Depreciation Expense $600,000 960,000570,000 360,000 330,000 180,000 $3,000,000 Ending Book Value $2,400,000 1,440,000 870,000 510,000 180,000 0 Lessee's Annual Analysis: Base Discount Rate: Residual Value Discount Rate: 8.0% 8.0% Cost of Owning: Equipment cost Maintenance Maint tax savings Depreciation shield Year 0 ($3,000,000) (100,000) 0 Year 1 Year 2 Year 3 Year 4 ($100,000) 0 0 ($100,000) 0 0 ($100,000) 0 0 $0 Residual value Residual value tax 1,125,000 0 Net owning CF ($3,100,000) PV cost owning: ($100,000) ($100,000) ($100,000) $1,125,000 ($2,530,801) Cost of Leasing: Lease payment Payment tax savings ($675,000) 0 ($675,000) 0 ($675,000) 0 ($675,000) 0 Net leasing CF ($675,000) ($675,000) ($675,000) ($675,000) PV cost leasing: $0 ($2,414,540) NAL = PV cost of leasing - PV cost of owning = $116,261 Net Cost of Leasing versus Owning: Lease CF - Own CF $2,425,000 ($575,000) Lessee's IRR = ($575,000) ($575,000) ($1,125,000) 6.0% Lessor's Annual Analysis: Base Discount Rate: Residual Value Discount Rate: 4.8% 4.8% Cash Flow Analysis: Equipment cost Maintenance Maint tax savings Depreciation shieldLease payment Tax on payment Residual value Residual value tax Net cash flow Year 0 ($3,000,000) (100,000) 40,000 675,000 (270,000) Year 1 Year 2 Year 3 Year 4 ($100,000) 40,000 240,000 675,000 (270,000) ($100,000) 40,000 384,000 675,000 (270,000) ($100,000) 40,000 228,000 675,000 (270,000) $144,000 1,500,000 (396,000) ($2,655,000) $585,000 Lessor's NPV = Lessor's IRR = $729,000 $573,000 $1,248,000 $99,368 6.2% Leveraged Lease: Unleveraged CF Unleveraged CF Loan amount Interest Int tax savings Principal repay Net cash flow Year 0 ($2,655,000) Year 1 $585,000 Year 2 $729,000 Year 3 $573,000 Year 4 $144,000 All except RV flows 1,104,000 RV flows (135,000) 54,000 (135,000) 54,000 (135,000) 54,000 (135,000) 54,000 (1,500,000) $504,000 $648,000 $492,000 ($333,000) 1,500,000 ($1,155,000) Lessor's NPV =Lessor's IRR = $67,305 8.8% Lease Payment Analysis Graphics Data: (Note: This table does NOT automatically recalculate when input values are changed.) Lease Payment $600,000 $620,000 $640,000 $660,000 $680,000 $700,000 $720,000 Lessee's Per Procedure Analysis: Lessee's NAL $0 $0 $0 $0 $0 $0 $0 Lessor's NPV $0 $0 $0 $0 $0 $0 $0 Total Value $0 $0 $0 $0 $0 $0 $0 Num of Proc 70 80 90 100 110 120 130 Per Procedure LeaseAnnual Annual Lease Net Payment Revenue $490,000 $700,000 $560,000 $800,000 $630,000 $900,000 $700,000 $1,000,000 $770,000 $1,100,000 $840,000 $1,200,000 $910,000 $1,300,000 Annual Profit $210,000 $240,000 $270,000 $300,000 $330,000 $360,000 $390,000 Annual Lease Payment $675,000 $675,000 $675,000 $675,000 $675,000 $675,000 $675,000 Annual Lease Annual Net Revenue $700,000 $800,000 $900,000$1,000,000 $1,100,000 $1,200,000 $1,300,000 Annual Profit $25,000 $125,000 $225,000 $325,000 $425,000 $525,000 $625,000 Profit Difference $185,000 $115,000 $45,000 ($25,000) ($95,000) ($165,000) ($235,000) END VALUE VERSUS LEASE PAYMENT AMOUNT $1 $1 $1 Total Contract Value $1 Lessee's NAL $1 $1 $0 Lessor's NPV $0 $0 $0 $0 $ 600,000 $ 620,000 $ 640,000 $ 660,000 Lease Payment ($) $ 680,000 $ 700,000 $ 720,000 Cases in Healthcare Finance, 5th Edition Copyright 2014 Health Administration Press CASE 17 QUESTIONS SEATTLE CANCER CENTER Leasing Decisions 1. As a baseline, assume all cash flows have the same risk; that is, ignore residual value risk and use the same discount rate for all lessee and lessor cash flows. a. Should the Center lease the equipment? Should GBF write the lease? b. Who is getting the better deal? Explain. c. What is the maximum lease payment that the Center would be willing to pay? What is the minimum lease payment that GBF would be willing to accept? d. What factor influence whether the actual lease payment will be closer to the Center’s maximum lease payment or GBF’s minimum lease payment? 2. This lease is attractive to both parties because there is asymmetry of inputs between the lessee and lessor. a. What are these asymmetries? b. What would be the result if there were no asymmetries? Prove it. 3. The Center is considering the inclusion of a cancellation clause in the lease contract, in which it couldcancel the lease at any time after giving a minimum 30 day notice. a. What impact would a cancellation clause have on the risk of the lease to the Center and the risk of the lease to GBF? Why? No additional calculations are required. b. What might GBF do to compensate for the change in risk? No additional calculations are required. 4. GBF has indicated that it would be willing to write a lease at a rate of $7,000 per procedure. Compare the risk of the per procedure lease to the conventional lease from the perspectives of both the lessee and lessor. (Hint: Graph the annual profit of a per-procedure lease and the annual profit of an annual lease against the number of procedures and interpret the graph.) 5. What would be the NAL to the Center if tax-exempt (municipal) debt financing was available to the Center? Would the availability of tax-exempt debt financing make leasing more or less attractive to the Center than before? Why? (Assume all cash flows have the same risk; that is, use the same discount rate on all lessee cash flows.) 6. What is the NAL to the Center after adjusting for the riskiness inherent in the residual value? Does recognition of residual value risk make leasing more or less attractive to the Center than before? Why? 7. Return to baseline assumptions. GBF will probably obtain a $1,500,000 simple interest loan from its bank at a cost of either 7 or 9 percent that it would use to leverage the lease. Should the lessor take the loan if the interest rate is 7 percent? Should the lessor take the loan if the interest rate is 9 percent? Justify your answer. 8. If the Center decides to lease, will the lease be classified as a capital lease and shown directly on the balance sheet? Show your calculations. 9. a. From the perspective of the Center, what types of financial risk are present in this decision? b. Finally, considering all relevant factors, including the possibility of obtaining a cancellation clause or a per procedure lease, what should the Center do, lease or buy? 12/6/2013 Case Questions Cases in Healthcare Finance 10. In your opinion, what are three key learning points from this case? Questions - 2Hire A Tutor For Your Homework www.helpingtutors.com Alternatevely contact me for it's solution at flat rate of $20 licservernoida@gmail.com
Related Search
We Need Your Support
Thank you for visiting our website and your interest in our free products and services. We are nonprofit website to share and download documents. To the running of this website, we need your help to support us.

Thanks to everyone for your continued support.

No, Thanks