Analyze financial information for the purpose of making viable management decisions.

Assignment Content
Competency
Analyze financial information for the purpose of making viable management decisions.
Student Success Criteria
View the grading rubric for this deliverable by selecting the “This item is graded with a rubric” link, which is located in the Details & Information pane.
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
Lease
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.
Recommend a course of action and the implications that your recommendation may have for the organization.

ANSWER
In the analysis of whether to lease or purchase a CT Scan unit for the hospital, it is essential to consider the financial aspects of both options. Here’s a breakdown of the costs associated with leasing and purchasing the equipment:

**Leasing the Equipment:**

1. **Lease Cost:** The total lease cost over 60 months is $26,000 per month, resulting in a total lease cost of $1,560,000.
2. **Maintenance:** The lease cost includes all maintenance expenses, so there are no additional maintenance costs.
3. **Total Expense:** The total expense for leasing is $1,560,000.

**Purchasing the Equipment:**

1. **Purchase Cost:** The CT Scan unit costs $1,300,000. It is important to note that this is a significant upfront capital expenditure.
2. **Interest:** Assuming a 10% present value (PV) rate, the interest expense is $1,300,000 * 10% = $130,000.
3. **Depreciation:** The equipment is depreciated over 5 years with straight-line depreciation. Therefore, the annual depreciation expense is ($1,300,000 – $130,000) / 5 = $234,000.
4. **Maintenance:** Annual maintenance expenses are $12,000.
5. **Total Expense:** The total expense for purchasing includes the purchase cost, interest, depreciation, and maintenance expenses. This totals to $1,300,000 + $130,000 + ($234,000 + $12,000 * 5) = $1,916,000.

**Tax Implications:**

1. **Leasing:** Lease payments are typically deductible as a business expense, which may result in lower taxable income for the nonprofit organization. However, it is crucial to consult with a tax advisor to understand specific tax implications.

2. **Purchasing:** When the organization purchases the equipment, it may be eligible for depreciation deductions over the asset’s useful life. This could also lead to a reduction in taxable income. However, the upfront cost needs to be considered.

**Recommendation:**

The decision to lease or purchase the CT Scan unit should be based on various factors, including the organization’s financial situation, long-term goals, and cash flow.

**Leasing** might be a viable option if the organization has limited upfront capital, as it spreads the cost over time and includes maintenance. The tax deductions from lease payments can provide financial relief.

**Purchasing** the equipment requires a substantial initial investment but may result in lower total expenses over time. It also gives the organization ownership of the asset, potentially increasing its long-term value. However, it’s essential to evaluate the organization’s financial capacity and willingness to commit to this capital expenditure.

Ultimately, the decision should align with the hospital’s overall financial strategy, long-term goals, and available resources. It is recommended to involve financial experts and possibly consult with a tax advisor to make an informed decision.