Net cash flow 420000 420000 420000 420000 0 4 pv cost

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3. Net cash flow($420,000)($420,000)($420,000)($420,000)$04. PV cost of leasing =($1,680,000)Lessee Cost of Leasing per Procedure (70 – 130 Procedures Annually)Range = $1,680,000 - $2,184,000
Exhibit 17.6: Lessor per Procedure Lease AgreementYear 0Year 1Year 2Year 3Year 4I. Cost of Leasing @ 100 Procedures Annually1. Net purchase Price($3,000,000)2. Maintenance cost($100,000)($100,000)($100,000)($100,000)3. Maintenance tax savings$40,000$40,000$40,000$40,0004. Depreciation tax savings240,000384,000228,000144,0005. Lease Payment$700,000$700,000$700,000$700,0006. Tax on lease payment($280,000)($280,000)($280,000)($280,000)7. Residual Value1,500,0008. Tax on Residual value$996,0009. Net cash flow ($2,640,000)$600,000 $744,000 $588,000 $2,640,000Lessor Profit Potential Leasing per Procedure (70 – 130 Annually)NPV Range = $296,000 - $1,095,000Exhibit 17.7: Lessor’s Analysis of Leveraged Lease Option:Year 0Year 1Year 2Year 3Year 4I. Leveraged Lease at 7% Interest1. Unleveraged cash flow($2,655,000)$585,000 $729,000 $573,000 $2,640,000 2. Loan amount1,500,0003. Interest($105,000)($105,000)($105,000)($105,000)4. Interest tax savings42,00042,00042,00042,0005. Principal Repayment(1,500,000)6. Net cash flow($1,155,000)$522,000 $666,000 $510,000 $1,077,000 IRR41%NPV$898,849.74 NPV of Leveraged Leaseat Different Interest Rates7%$898,8508%$872,9149%$846,979
AnalysisThe first analysis that was ran was to compare the Net Advantage to Leasing (NAL) the Gamma Knife given the three different projected salvage values of the equipment. If the Center could only recoup $500,000 on the Gamma Knife at the end of the four years, the NAL would be $124,000, or a realized savings of $124,000. There is a 75% chance that at least $1,000,000 would be recouped, meaning that the decision to lease as opposed to purchase would cost the Center between $376,000 to $1.38M, depending on actual value of salvage. If the Centerwere to purchase the Gamma Knife, they have two options with which to purchase: (1) to take out a municipal loan with a 5% interest rate for the purchase or (2) to make the purchase with current securities paying 3%. When projecting cash flows utilizing the original base-case analysis combined with projected revenues from performing 100 procedures annually at the rate of $10,000/procedure and then discounting those cash flows, the Net Present Value of using debt capital is $1,352,523, indicating that the project is anticipated to be solidly profitable using option 1, even when debt payments are considered. An analysis of the opportunity cost involved in using money that is currently in short-term securities with a 3% return, using existing funding carries with it a $278,181 opportunity cost.

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