The Southeast Medical Clinic requires a feasibility study to find out if its financially beneficial to undertake an X-ray and blood testing equipment in house and forego its receipt of referral fees. To ferret out the truth of the mutually exclusive options, a financial consultant must take into consideration all the variables involved in such a financial venture.
Operation and Financial Considerations
The first determination focuses on the Net Present Value (NPV) of the whole project. Based on the MACRS schedule and other current parameters such as support, salvage value, annual fees derived, annual salary costs mentioned in the clinic’s operation, NPV is negative if traditional discounting method is employed ( See Exhibit 2). However, if a mid-year discounting method is employed, NPV is positive (Exhibit 2). Thus, it’s feasible for the clinic to undertake the investment. One hurdle though facing the company is how and what financing alternatives to pursue. Is the clinic better off by going for a five–year secured financing with 10% interest rate, no down payment, and an annual payment at the end of each year? Should the clinic consider the five-year lease option which includes an upfront $50,000 security deposit and annual $94,000 payments at the end of each year of the next five years with the equipment reverting back to the lessor at the end of the lease term?
Calculations and Assumptions
Exhibit 2 displays the calculations showing both breakdowns of the financing and the leasing options. Although the secured financing alternative looks attractive because of the absence of down payment, resulting net present value of cash outflowswith the tax shield amounts equates to a negative NPV ...