Purchase versus lease. Penn Medical Center, a taxpaying entity, is considering the purchase of a 64-slice computed tomography scanner. The cost of the scanner is $4 million. The scanner would be...

Purchase versus lease. Penn Medical Center, a taxpaying entity, is considering the purchase of a 64-slice computed tomography scanner. The cost of the scanner is $4 million. The scanner would be depreciated over 10 years on a straight-line basis to a zero salvage value. The tax rate is 40 percent. The financing options include either borrowing for the full cost of the scanner or leasing a scanner. The lease option is a 5-year lease with equal before-tax lease payments of $950,000 per year. The borrowing alternative is a 5-year loan covering the entire cost of the scanner at an interest rate of 5 percent, which is also the implied lease rate. The after-tax cost of debt is 3 percent. Should Penn Medical lease the scanner or borrow the full amount to purchase it?