A company wishes to use equipment that cost £1 million and that will have zero residual value at the end of five years. Management is satisfied that the equipment would represent an attractive project with a positive net present value . The company approaches a lessor with regards to a financial lease, and the lessor agrees to lease the equipment at an annual rental of £300 000 over five years, with each payment to be made in advance. Assume a post-1986tax system with 25% writing down allowances and a corporation tax rate of 35% and that the company is a full taxpayer. Alternatively, the company can finance the purchase by borrowing £1 million at an interest rate of 20% per annum .

Should the company lease or borrow?