Heavy Kat$$s Ltd$.($HK$)$ is looking at acquiring new equipment for the production of the HKMV$55,$ which will cost $$7$ million and has an estimated useful life of $10$ years. For accounting purposes, this equipment will also be depreciated on a straight$-$line basis. It belongs to an asset class with a CCA rate of $10\%.$ The equipment has an estimated salvage value of $$500,000$ at the end of its useful life. As the equipment qualifies for the Accelerated Investment Incentive, $1\mathrm{.}5$ times the CCA can be taken in the year of acquisition. At the end of the planning horizon, assume that there is still a positive balance remaining in the class after the deduction of the proceeds. HK$$s corporate tax rate is $28\%.$ Using a $12\%$ discount rate, HK has determined that the acquisition is economically viable.

HK has the option of leasing the new equipment for a $10-$year period at annual payments of $$1,000,000$ at the beginning of each year, and that it can borrow from its bank at an after$-$tax interest rate of $4\mathrm{.}1\%.$

Required:

Should HK lease or purchase the equipment?

Why is the after$-$tax cost of borrowing the appropriate discount rate for use in a purchase or lease decision?