Use the Information for the Question(s) Below

question 27

Multiple Choice

Use the information for the question(s) below.
St. Martin's Hospital plans to purchase or lease a $2 million CT scanner. If purchased, the CT scanner will be depreciated on a straight-line basis over five years, after which it will be worthless. If leased, the annual lease payments will be $500,000 per year for five years. St. Martin's borrowing cost is 8%, and its tax rate is 35%.
-Should St. Martin lease the scanner or borrow the funds and buy the scanner?

• A) Buy the scanner; the NPV of the decision = $74,890.28.
• B) Buy the scanner; the NPV of the decision = $1,749,890.28
• C) Lease the scanner; the NPV of the decision = $1,812,027.19
• D) Lease the scanner; the NPV of the decision = $692,559.51

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Definitions:

Market

A place or system where buyers and sellers interact to exchange goods, services, or information.

Consumer Surplus

Consumer Surplus is the difference between the highest price a consumer is willing to pay for a good or service and the actual price they pay.

Tax

A mandatory financial charge or some other type of levy imposed on a taxpayer by a governmental organization in order to fund government spending and various public expenditures.

Reduction

The act of making something smaller or less in amount, degree, or size.