Hello,

I am very lost on this assignment.

Please provide an explanation to all the answer and show the formulas and calculations (in an excel sheet).

1. Should the Center lease the equipment?
2. What is the maximum lease payment that the Center would be willing to pay?
3. What would be the NAL to the Center if tax-exempt (municipal) debt financing was available to the Center?
4. Would the availability of tax-exempt debt financing make leasing more or less attractive to the Center than before? Why

o Seattle plans to acquire a new Gamma Knife to replace its current model. The equipment has an invoice price of $3 million, including delivery and installation charges, and it falls into the MACRS (modified accelerated cost recovery system) five-year class, with current allowances of 0.20 in Year 1, 0.32 in Year 2,0.19 in Year 3,0.12 in Year 4,0.11 in Year 5, and 0.06 in Year 6. The manufacturer of the equipment will provide a maintenance contract for $100,000 per year, payable at the beginning of each year, if Seattle buys the equipment. Furthermore, the purchase could be financed by a four-year, simple-interest, conventional (taxable) bank note that would carry an inter- est rate of 9 percent. Regardless of whether the equipment is purchased or leased, Seattle's managers do not think the new Gamma Knife will be used for more than four years, at which time Seattle plans to open a new radiation therapy facility. Land on which to construct a larger facility has already been acquired, and the building should be ready for occupancy at that time. The new facility is designed to enable Seattle to use several new radiosurgery procedures. Thus, the Gamma Knife replacement is viewed as a \"bridge,\" to serve only until the new facility is ready. The expected physical life of the equipment is ten years, but medical equipment of this nature is subject to unpredictable technological obsolescence. After considerable debate among Seattle's managers, they concluded that there is a 25 percent probability that the residual (salvage) value after four years will be $800,000; a 50 percent probability that it will be $1.2 million; and a 25 percent probability that it will be $1.6 million, which makes the \fin reimbursing for such procedures, so the revenue stream is highly specu- lative. Accordingly, he thinks that a high discount rate should be used in the analysis. Vanessa, on the other hand, believes that leasing is a substirute for \"other financing,\" which is a blend of debt and equity capital. Conse- quently, she asserts that the lease-analysis cash flows should be discounted at Seattle's corporate cost of capital, 10 percent. However, it is possible that both Randall and Vanessa are wrong. Both Randall and Vanessa believe that lessees should not blindly accept the first offer made by potential lessors but should conduct a complete analysis from the viewpoint of both parties and then, using this knowledge, negotiate the best deal possible. Thus, knowing the range of lease payments that is acceptable to both parties is important. There is a possibility that Seattle will move to its new radiation facility earlier than anticipated and hence before the expiration of the lease. Further- more, if the neurosurgeonthe primary user of the Gamma Knifeleaves the staff and is not immediately replaced, the equipment would be useless. Thus, Randall is considering asking GB Financing to include a cancella- tion clause in the lease contract. Under such a clause, Seattle would be able to return the equipment at any time during the lease term after giving a minimum 30-day notice. Before negotiations begin, Seattle must assess the impact of such a clause on the riskiness of the lease to both parties and any consequences the clause might have on the terms of the lease. In addition, Randall is aware that many lessors are now writing per pro- cedure leases, in which the lease payment is tied to the number of procedures performed rather than a fixed amount. He wonders what the consequences would be for both the lessee and the lessor if a per procedure lease were used instead of a conventional lease. GB Financing has quoted a per proce- dure lease rate of 7,000 on the basis of an expected annual volume of 100 procedures. However, past experience at Searttle indicates that volume could easily be as low as 70 procedures or as high as 130 procedures. Considering current charges and reimbursement rates, Seattle expects to realize a net revenue per procedure of roughly $10,000. Seattle's leadership has discussed obtaining tax-exempt financing for the Gamma Knife should it be purchased. If so, the cost of tax-exempt (municipal) debt would be only 5 percent. GB Financing would probably obtain a $1.5 million simple-interest loan to leverage the lease. The terms of this loan have not been finalized, but the bank has indicated that the interest rate would be in the range of 7 to