Problem:
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%?