This week\'s Application Assignment focuses on Chapters 20 and 21 of Essentials
ID: 2665600 • Letter: T
Question
This week's Application Assignment focuses on Chapters 20 and 21 of Essentials of Health Care Finance.
Solve the following two problems and submit the answers and the work you did to obtain the answers in a Word document.
Problem 1: You need a new CT scanner. The scanner can be leased under one of two options. Option A is a straight lease payment of $180,000 per year, payable one year in advance. Option B is a per-procedure lease basis. Under option B, you would pay $50,000 per year regardless of volume, payable one year in advance. In addition, $100 per procedure would be paid at year end. In each case, the lease term is 5 years. Expected volumes for the CT scanner by year are: 1,000—year 1; 1,200—year 2; 1,500 in years 3, 4 and 5. Which lease has the lowest net present value cost if the discount rate is 12%?
Problem 2: Your firm is considering the following three alternative bank loans for $1,000,000:
a) 10% loan paid at year end with no compensating balance
b) 9% loan paid at year end with a 20% compensating balance
c) 6% loan that is discounted with a 20% compensating balance requirement
Assume that you would normally not carry any bank balance that would meet the 20% compensating balance requirement. What is the rate of annual interest on each loan?
Please e-mail to ceusdorothy@gmail.com
Explanation / Answer
Cost
Discount/Interest
Cash Payment
Payments
Rate 12%
Present Value
180000
21600
201600
180000
21600
201600
180000
21600
201600
180000
21600
201600
180000
21600
201600
1008000
Cost
Discount/Interest
Cash Payment
Total
Total Cost
Payments
Rate 12%
Present Value
Procedures
Procedure cost
50000
6000
56000
1000
100000
156000
Year 2
50000
6000
56000
1200
120000
176000
Year 3
50000
6000
56000
1500
150000
206000
Year 4
50000
6000
56000
1500
150000
206000
Year 5
50000
6000
56000
1500
150000
206000
Total Cost of second option
950000
Option 1Cost
Discount/Interest
Cash Payment
Payments
Rate 12%
Present Value
Year 1180000
21600
201600
Year 2180000
21600
201600
Year 3180000
21600
201600
Year 4180000
21600
201600
Year 5180000
21600
201600
Total Cost of first option1008000
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