Lease versus borrow to purchase

It is time for the renewal of existing photocopying equipment at Runt Ltd. The current equipment is worth $14,500. New equipment will cost $135,000.

The $120,000 can be borrowed from the local bank at 5 percent interest with annual payments at the end of each of five years. The CCA rate on the equipment would be 20 percent. The equipment will be salvaged in 5 years for $30,000. An annual maintenance expense of $2,000 would be required at each year end if they purchase the equipment (but not if they lease).

Runt could also lease the equipment with annual lease payments of $27,500 payable at the beginning of each year. Tax savings are at year end.

The cost of capital is 10 percent and the tax rate is 25 percent.

Should Runt Ltd. lease or borrow to purchase the photocopying equipment?