Tidewater Hospital, a taxpaying entity, is considering a leasing arrangement for its ambulance fleet. The fleet of ambulances costs $250,000 and will be depreciated over a ten-year life to a salvage value of $50,000. Tidewater could finance the entire fleet with equal annual debt and principal payments at a before-tax cost of debt of 9 percent and an after-tax cost of debt at 6 percent for ten years. Alternatively, it could lease the fleet for ten years. The before-tax lease payments are $45,000 per year for ten years. Tidewater”s tax rate is 40 percent. From a financial perspective, should Tidewater lease or borrow the money to buy the ambulances?
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