A private hospital needs to equip an operating theatre by installing new medical
equipment. The equipment costs £700,000 to buy outright, and is expected to
require continuing maintenance costs of £30,000 p.a. for five years. At the end of
five years it is expected to have a scrap value of about £100,000. With the benefits
deriving from the new equipment, the hospital can expect to generate extra income
of about £300,000 p.a. for the first three years, falling to an additional £200,000 p.a.
for the remaining two years.
An alternative is to lease slightly more advanced equipment, which would require an
initial deposit of £400,000, followed by five annual end-of-year payments of £120,000
each. The lessor will maintain the equipment and will reclaim the equipment at the end
of Year 5. Income is expected to increase by £300,000 p.a. over the entire five-year period.
Assume that the cost of capital is 8% p.a.
Discount factors at 8% p.a. are:
| Year | Discount factor |
| 1 | 0.926 |
| 2 | 0.857 |
| 3 | 0.794 |
| 4 | 0.735 |
| 5 | 0.681 |
Should the hospital buy or lease, and what additional information might be needed
before a final decision is taken?
