Please help me with D and E. Thank you!

7 Lewis Health System Inc. has decided to acquire a new electronic health record system for its 8 Richmond hospital. The system receives clinical data and other patient information from nursing units 9 and other patient care areas, then either displays the information on a screen or stores it for later 10 retrieval by physicians. The system also permits patients to call up their health record on Lewis's 11 12 The equipment costs $1,000,000, and, if it were purchased, Lewis could obtain a term loan for the full 13 purchase price at a 10 percent interest rate. Although the equipment has a six-year useful life, it is 14 classified as a special-purpose computer, so it falls into the MACRS three-year class. If the system 15 were purchased a four-year maintenance contract could be obtained at a cost of $20,000 per year, 16 payable at the beginning of each year. The equipment would be sold after four years, and the best estimate of its residual value at that time is $200,000. However, since real-time display system 17 technology is changing rapidly, the actual residual value is uncertain. 18 19 As an alternative to the borrow-and-buy plan, the equipment manufacturer informed Lewis that 20 Consolidated Leasing would be willing to write a four-year guideline lease on the equipment, 21 including maintenance, for payments of $260,000 at the beginning of each year. Lewis's marginal federal-plus-state tax rate is 30 percent. You have been asked to analyze the lease-versus-purchase 22 decision, and in the process to answer the following questions: 23 24 a. What is the present value cost of owning the equipment? 25 b. What is the present value cost of leasing the equipment? 26 c. What is the net advantage to leasing (NAL)? 27 d. Answer these questions one at a time to see the effect of the change on NAL. That is, starting with 28 the original numbers you used for questions a. and b., what is the NAL if: 29 - interest rate increases to 12 percent 30 - maintenance cost increases to $25,000 per year 31 - residual value falls to $150,000 32 - the system price increases to $1,050,000? 33 e. Do the changes in d. make leasing more or less attractive? Explain. 34 35 ANSWER J K L M N A B D E F G H 35 ANSWER 36 Pre-tax interest rate 10% MACRS 37 Tax rate -30% Year 1 Year 2 Year 3 Year 4 38 After-tax interest rat 7% 33% 45% 15% 7% 39 Lease payment -$260,000 40 System purchase pric -$1,000,000 41 Maintenance -$20,000 42 Residual value $200,000 43 44 a. 45 Year 0 Year 1 Year 2 Year 3 Year 4 46 Cost of owning: 47 Net purchase price $1,000,000 48 Maintenance cost -$20,000 $20,000 $20,000 -$20,000 49 Maintenance tax savings $6,000 $6,000 $6,000 $6,000 50 Depreciation tax savings $99,000 $135,000 $45,000 $21,000 51 Residual value $200,000 52 Tax on residual value $60,000 53 Net cash flow -$1,014,000 $85,000 $121,000 $31,000 $161,000 54 55 b. 56 Cost of leasing: 57 Lease payment -$260,000 $260,000 -$260,000 $260,000 58 Lease tax savings $78,000 $78,000 $78,000 $78,000 59 Net cash flow $182,000 $182,000 $182,000 $182,000 60 61 Net advantage to leasing: 62 PV cost of leasing -$659,626 63 PV cost of owning $680,743 64 NAL $21,118 65 (yearly maintenance cost * marginal tax rate) (MACRS * equipment cost) * marginal tax rate) 67 68 69 Net advantage to leasing: 70 PV cost of leasing 71 PV cost of owning 72 NAL 73 74 d. 75 76 e. Interest Mainten Residual System rate cost value price 12% $25,000 $150,000 $1,050,000 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0