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Gamma Knife Lease vs Purchase Analysis MD Peterson Cancer Center
- 1. M.D Peterson Cancer Center Lease vs. Purchasing Phil Hickmon 2005
- 2. The Gamma Knife Gamma Knife surgery is recognized worldwide as the preferred treatment for meta-static brain tumors and has successfully treated primary brain tumors and arteriovenous malformations. It is proven safe over the long term and is recognized and covered by most insurance plans.
- 6. Leasing The Gamma Knife… Will require no down payment and finances only the value of the equipment expected to be depleted during the lease term. MD will have an option to buy the equipment for its remaining value at lease end. The leased equipment itself is usually all that is needed to secure a lease transaction. MD can transfer all risk of obsolescence back to the lessor, as there is no obligations to own equipment at the end of the lease. If this lease is structured as a true lease , the center may claim the entire lease payment as a tax deduction. More of the cash flow , especially the option to purchase the GK, occurs later in the lease term when inflation makes dollars cheaper.
- 8. Lease or BUY “ Debt Financing” “ Finance and Investment Decision”
- 9. MD’s Accounting For Lease Arrangement The life of the lease is at least 75% of the asset’s life. The ownership of the asset is transferred to the lessee at the end of the life of the lease. There is a “bargain purchase” option, whereby the purchase price is below expected market value, increasing the likelihood that ownership in the asset will be transferred to the lessee at the end of the lease. The present value of the lease payments exceeds 90% of the initial value of the asset.
- 12. Modified Accelerated Cost Recovery System (MACRS)
- 13. Lessee’s Dollar Cost Analysis
- 14. Percentage Costs Analysis (Net Cost of Leasing vs. Owning) Does this give the Center an advantage?
- 15. Lessor’s Dollar Costs Analysis $$ CASH FLOW $$
- 17. Comparing Dollar Costs Analysis What will give the medical Center the better advantage?
- 18. Lessee Cancellation Clause…. This particular lease is an “operating lease,” often known as a rental agreement. It has the following features: the term of the lease is usually considerably shorter than the expected useful life of the asset; and it is cancellable by the lessee at short notice with little or no additional cost or contractual penalty. Cancellation clauses in leases can allow you to end the lease at any time, simply by returning the equipment. This can be of benefit should MD decide the equipment is not what they need or if better options arise. Usually, a fee is required to cancel, but not in all cases. MD should make sure that if a cancellation fee exists it is reasonable.
- 19. Tax Exempt Financing (purchasing the GK) …. If lease payments are made over a period much shorter than the GK’s life and the MD is allowed either to continue leasing the asset at a nominal amount or to buy the asset at a price below market, the IRS may view the lease as a loan and prohibit the lessee from deducting the lease payments in the year(s) in which they are made. Thus, this is a type of lease in which implied interest payment is non taxable to the lessor. Since the lessor gains the tax exempt status of the interest payment, GBF should therefore provide a small payment due to the lessee. As a consequence, leasing is not automatically less costly for non for profit firms. Since this is a short term lease, applying for tax exempt status would probably be more costly than the actual achieved gain.
- 22. The End Thank You! Questions and Discussion
Notes de l'éditeur
- If lease payments are made over a period much shorter than the GK’s life and the MD is allowed either to continue leasing the asset at a nominal amount or to buy the asset at a price below market, the IRS may view the lease as a loan and prohibit the lessee from deducting the lease payments in the year(s) in which they are made. Thus, this is a type of lease in which implied interest payment is non taxable to the lessor. Since the lessor gains the tax exempt status of the interest payment, GBF should therefore provide a small payment due to the lessee. As a consequence, leasing is not automatically less costly for non for profit firms. Since this is a short term lease, applying for tax exempt status would probably be more costly than the actual achieved gain.
- The effects of leasing an asset on accounting statements will depend on how the lease is categorized by the Internal Revenue Service (for tax purposes) and by generally accepted accounting standards (for measurement purposes). Since leasing an asset rather than buying it substitutes lease payments as a tax deduction for the payments that would have been claimed as tax deductions by the firm if had owned the asset (depreciation and interest expenses on debt), the IRS is wary of lease arrangements designed purely to speed up tax deductions. Some of the issues the IRS considers in deciding whether lease payments are tax deductible include the following: Are the lease payments on the asset spread out over the life of the asset or are they accelerated over a much shorter period? Can the lessee continue to use the asset after the life of the lease at preferential rates or nominal amounts? Can the lessee buy the asset at the end of the life of the lease at a price well below market? Allow firms to take assets off the balance sheet and reduce their leverage, at least in cosmetic terms; in other words, leases are sometimes a source of off-balance sheet financing. Consequently, the Financial Accounting Standards Board (FASB) has specified that firms must treat leases as capital leases if any one of the following four conditions hold: Effect on Expenses, Income and Taxes If, under the above criteria, a lease qualifies as an operating lease, the lease payments are operating expenses which are tax deductible. Thus, although lease payments reduce income, they also provide a tax benefit.
- Bundling of services Lessors often attempt to bundle additional services (for example, maintenance of the equipment) together with the finance component of the lease under one costing and one contract. This can occ ur even if the additional services are not provided by the lessor, but by a third party. There are two main concerns with the bundling of lease arrangements with additional services: lessees are not in a position to assess costs or benefits and competitiveness of the services and the finance component of the lease independently of one another; and lessees could lose their ability to seek recourse to the service provider if a problem arises. Potential problems may arise if a maintenance provider fails to perform its maintenance obligations. Under most rental agreements, the lessee is obliged to continue making payments, despite any breakdown of the equipment.
- The MACRS calculation lets you generate depreciation schedules using the MACRS method. MACRS stands for "Modified Accelerated Cost Recovery System". MACRS categorizes all business assets into classes and specifies the time period over which you can write off assets in each class. Depending on the class of an asset, different conventions can be used to adjust the first year depreciation depending on the placed-in-service date. The main characteristics of this method are that property class lives are less than actual useful lives and that salvage values are assumed to be zero.
- Criteria To Be Cancelled: If GBF consents to the cancellation. A remote or unexpected contingency occurs that has a significant impact on the terms of the lease; MD is required, under the terms of the lease, to enter into another lease for the same or equivalent property with GBF or a party related to GBF. The lease provides for substantial penalties so as to discourage cancellation. Cancellation penalties: A true operating lease should enable MD to exit the lease should the equipment become either obsolete or surplus to requirements.
- 85 percent of senior financial executives agree that leasing equipment is a good business strategy for meeting the demands of a growing company. According to industry research, approximately $2,873,783,066 of medical equipment is leased each year in the United States. Medical Centers lease medical equipment because they know that leasing offers numerous advantages over other type of financing, including tax deductions, balance sheet management, immediate write-offs, great flexibility, customized solutions, better asset management, improved cash flow, flexible end of term options, easy upgrades, and fast processing.