Purchase versus lease. Hopewell Health System wants either to borrow money to purchase a hospital or to enter into a lease agreement with the city of Hopewell. The purchase price of the hospital is...

Purchase versus lease. Hopewell Health System wants either to borrow money to purchase a hospital or to enter into a lease agreement with the city of Hopewell. The purchase price of the hospital is $55 million. Assuming 100 percent financing, the interest rate is 8 percent for the loan, with an after-tax cost of debt of 5 percent. The 8 percent interest rate on the loan is also the implied borrowing rate for the lease. The length both of the loan and of the lease is 5 years. The before-tax lease payments are expected to be $15 million per year. The tax rate is 40 percent for Hopewell Health System. Should Hopewell Health lease or borrow the money to purchase the hospital?