Frasers CFO is considering two financing alternatives:

(1) Borrow and purchase the new equipment. Fraser could obtain a 7 year-loan at 6.3% from its bank for 100% of the equipment cost ($1,065,000).

(2) Lease the new equipment from Vancouver Leasing Corporation (VLC).

VLCs tax rate is 35%. Its WACC is equal to 9.2%. VLC could obtain a 7-year loan at 4.2%.

Frasers WACC is equal to 12.5%, the marginal tax rate is 30%, and the CCA rate is 30%.

The new equipment will have an estimated useful life of 7 years and an estimated salvage value of $275,000 (in 7 years). The annual lease payment would be $163,400 (payment due at the beginning of each of the next 7 years). Under the proposed contract, the lessor will pay for maintenance ($20,000 annual cost, payable at year-end).

Based on the data provided in this question, should Fraser lease the new equipment.