Discuss in a 250 words:
Hospital Budgets
As a department head in the hospital, you and your colleagues need to decide on whether to purchase new equipment.
The acquisition cost is $75,000 if it is purchased. The depreciation of the equipment will be $10,000 for years two through four. If the equipment is leased, it will cost $11,000 per year, for five years.
• In regards to owning versus leasing, which method would you recommend and why?
• Explain using your understanding of capital budgeting and capital structure decisions
Example of the Work (do not copy from this example)!
When a company is making the decision to own versus lease a piece of equipment numerous things have to be taken into consideration. The tax status of the business, the value of the equipment, purchase versus lease pricing, and depreciation amount are important factors in this decision.
The example given is whether to purchase a piece of equipment for $75,000 knowing it depreciates $10,000 years 2-4 or to lease it at a cost of $11,000 over 5 years. A for-profit business can enjoy the luxury of a tax savings with leasing a piece of equipment and a not-for-profit business would not receive the tax savings.
When making this type of decision, capital structure and capital budget should also be considered. Capital structure represents the equity/debt relationship of an organization. The various sources of capital help guide decisions to incur debt. Capital budgeting budgets into the future. This is important when deciding on buying versus leasing because depreciation amounts, tax savings, and overall salvage values should be taken into consideration in order to calculate the net cash flow from the equipment from year to year. Also the return on investment is essential to make a business decision to buy versus lease an expensive piece of equipment.
Baker, J. J., & Baker, R. W. (2014). Health care finance: Basic tools for nonfinancial managers (4th ed.). Sudbury, MA: Jones and Bartlett Publishers.