Willy Wonka just founded the Hospital for Toys and Puppets. The hospital is an T

Question

Willy Wonka just founded the Hospital for Toys and Puppets. The hospital is an The Board of Trustees is evaluating whether the hospital should buy or lease an fMRI machine If they purchase the machine, they expect to pay $1.2 million, and will depreciate the machine on a straightline basis over its 10-year economic life. There are no t non-profit entity. It does not pay any taxes plans to sell the machine after 10 years If they lease the machine, they expect to pay $140,000 at the beginning of each year for a period of 10 years. Additionally, they expect to pay a security deposit of $250,000 at the beginning of the lease, which will be returned at the expiration of the lease at the end of the 10th year The hospital's cost of debt is rd-70%. What is the value (NAL)of the lease on the fMRI machine? Round your answer to the nearest dollar, and not use any symbols or commas. For example, write $12,345.67 as "12346" Should the hospital lease or buy the (MRI machine? Lease O Buy Pick the combination that best completes these sentences Nonprofit accounting differs slightly from accounting for public corporations, but there are many similarities. Based on FAS 13, we would expect that this lease need to be recorded on the balance sheet because it is a(n) lease would not, operating would not, capita would, operating O O would, capital

Explanation / Answer

1. Value (NAL) of lease = (Annual lease rental payment x PVAD7%,10) + Security deposit - (Security deposit x PV7%,10)

= ($140000 x 7.515232) + $250000 - ($250000 x 0.508349)

= $1,175,045

Cost of purchase = $1,200,000

The cost of leasing is lower. Hence the hospital should lease the machine.

2. This is a capital lease since the period of lease is greater than 75% of the asset's useful life.

would, capital

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