A firm plans to either lease a piece of equipment or purchase it. The upfront purchase price is $800,000, and it is depreciated at $80,000 per year for tax purposes. The equipment could be sold in nine years for $80,000. If the firm leases the equipment under an operating lease, it pays annual lease payments of $40,000 at the beginning of each of nine years. The firm’s effective tax rate is 40 percent. Determine whether or not the firm should lease the equipment, assuming the before-tax cost of borrowing is 8 percent.
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