Module 6 Discussion: Initial Post
Lease or Buy the X-Ray? Present Value Says Buy, Cash on Hand Might Say Lease
Lease or buy decisions look simple because the lease payments add up to more than the purchase price, but the right comparison discounts both streams to today's dollars and then asks what else each choice affects. Here is a composite example. A community health center needs a new digital X-ray system. It can buy the system for $180,000, pay about $9,000 a year for a service contract in years two through five after the first-year warranty, and sell it for about $20,000 after five years. Or it can lease it for $3,900 a month for 60 months, paid at the start of each month, with maintenance included and the system returned at the end.
The lease payments total $234,000, which makes buying look far cheaper, but that ignores timing. Discounting at the center's 6 percent cost of borrowing, the present value of the lease payments is about $202,700. The present value of buying, the purchase price plus discounted service costs minus the discounted resale value, is about $194,500. Buying is cheaper by about $8,300 in today's dollars, a real but modest difference. Put another way, the lease would break even at a payment of about $3,740 a month, so a small concession from the vendor would erase buying's advantage. Discounting both options at the organization's borrowing rate is the standard approach, because a lease is a form of borrowing: it commits the organization to fixed payments much like a loan (Brealey et al., 2020).
The present value is not the whole decision. Buying requires $180,000 in cash now. A health center with thin reserves might reasonably pay a little more to keep that cash available for payroll during a delay in grant or Medicaid payments, since running short of cash can cost far more than $8,300. The cheaper option on paper is not always the cheaper option for an organization that cannot afford to be wrong about its cash. On the other side, leasing no longer hides the obligation. Under the current lease accounting standard, a lessee records most leases running beyond 12 months on its balance sheet, showing both the right to use the equipment and the obligation to pay for it (Financial Accounting Standards Board, 2016), so lenders and board members will see the commitment either way. Other factors include technological obsolescence, which a lease shifts to the vendor, and the risk that the resale value assumption is too optimistic (Reiter & Song, 2021).
My recommendation would be to buy if the center holds enough cash to absorb the purchase and still cover its operating needs comfortably, and to negotiate the lease payment down toward $3,740 if it does not. A question for the group: has anyone seen an organization choose to lease primarily to protect cash, and did it turn out to be the right call?
References
Brealey, R. A., Myers, S. C., & Allen, F. (2020). Principles of corporate finance (13th ed.). McGraw-Hill Education.
Financial Accounting Standards Board. (2016). Leases (Topic 842) (Accounting Standards Update No. 2016-02).
Reiter, K. L., & Song, P. H. (2021). Gapenski's healthcare finance: An introduction to accounting and financial management (7th ed.). Health Administration Press.
How this HCA 125 Module 6 example is structured
Aspen's catalog describes HCA 125 as covering returns on capital equipment, and the course page lists capital-budgeting problems and case studies with recommendations. Aspen does not publish module deliverables, so check your classroom for the exact prompt. This example compares present values, finds the break-even payment, weighs nonfinancial and accounting factors and gives a conditional recommendation with a question for peers.
HCA 125 Module 6 questions, answered
What does the HCA 125 Module 6 discussion usually ask for?
Discussions in this part of HCA 125 often ask you to apply capital budgeting or time value of money ideas to a healthcare decision, such as whether to lease or buy equipment. Aspen does not publish module deliverables, so your classroom's instructions govern.
How do you compare leasing and buying?
Discount the lease payments and the costs of buying, including maintenance and resale value, to present value at the organization's borrowing rate, then compare, and weigh cash, obsolescence and accounting effects.
Do leases still stay off the balance sheet?
Mostly no. Under the lease standard in Topic 842, most leases running beyond 12 months go on the balance sheet as both an asset, the right to use the item, and a liability, the payments owed.
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