You are currently leasing the space for your clinic at $2000 per month. The owne

Question

You are currently leasing the space for your clinic at $2000 per month. The owner of the building wants you to either sign a 8-year lease or sell you the building. The current owner includes basic maintenance worth $500 per month in the lease. Though, if you buy, you will have to pay for the maintenance. Your practice covers everything else involved, regardless of whether you lease or buy. Your practice is a non-profit organization.    The area around the clinic has undergone considerable change as old apartment buildings have been rehabbed and converted to condos. Depreciation of your clinic is equal to $6000. Salvage value is assumed to be $250,000. Loan rate is 6.5%

a.What is the cost of leasing?

b. Assuming a purchase price of $300,000 what is the cost of owning?

Explanation / Answer

Answer-1 Now for the lease: Year 1 2 3 4 5 6 7 8 Lease rents $24,000 $24,000 $24,000 $24,000 $24,000 $24,000 $24,000 $24,000 Cost of lease can be calculated by calculating the present value all lease rentals @ discount rate of 6.5% per annum. Therefore, Cost of lease = $146,130.02 Answer-2 Cost of equipment = $300,000 Life of equipmnt = 8 years Cost of funds = 6.5% Depreciation on machinery = $6,000 Now we need to find out the NPV of the cost of machinery Year 0 1 2 3 4 5 6 7 8 Initial Cost ($300,000) Maintenance ($6,000) ($6,000) ($6,000) ($6,000) ($6,000) ($6,000) ($6,000) ($6,000) Salvage Value $250,000 Interest @6.5% ($19,500.0) ($19,500.0) ($19,500.0) ($19,500.0) ($19,500.0) ($19,500.0) ($19,500.0) ($19,500.0) Cost of owning= $4,205.35

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