Healthcare Finance Report | A Case Study

The plan by the Portland Cancer Center to acquire new Gamma Knife in order to replace its current model was faced with different issues that were raised by the center’s managers. This led to challenges in lease decision making as they were torn between buying the Gamma Knife or leasing it and how well to finance the capital expenditure. Managers disagreed on the probability of the equipment’s residual value after the four years Randall Williams, who is the chief financial officer of the center thinks that a high discount rate should be included in the analysis of the cash flows associated in the performance of stereotactic radiosurgey which is uncertain according to him.

Vanessa Seagle on the other hand, believes that leasing will be a substitute for other financing. It is therefore important for the managers to fully explore the options of leasing the equipment versus buying and how best they can fund the expenditure. Other issues raised include the fact that the Gamma Knife may become technologically obsolete before the end of four years, moving the new radiation facility before the expiry of the lease, and that neurosurgeon who is the facilities main user may leave rendering the equipment useless. 

The dollar cost analysis of owning the equipment is $2,665,672 while that one of leasing is $2,352,625 resulting in a net advantage from leasing of $312, 047. The per-procedure lease would only be fair if they consistently fall below 97 procedures per year. The financing by GB would require quoted yearly lease payments with a cost savings of $608,000 arising from the agreement, hence saving the clinic 25% of the contract price. The lease will also act as an answer for the Center’s short-term commitment with least risks associated as a result of the pending construction of the new facility that would take a period of 4 years.

 The clinic should also negotiate a lower yearly payment with GBF to range of $608,000 to $636,000. The GBF offers a more financially favorable option to the center as compared to the purchase of Gamma Knife. The center should also require the GBF to make an inclusion of a favorable cancellation clause in the lease agreement. It is therefore evident that the Portland Cancer Center would financially gain from leasing than purchasing the equipment.