A company is planning to move to a larger office and is trying to decide if the new office should be owned or leased. Annual cash flows for owning versus leasing are estimated as follows. Assume that the cash flows from operations will remain constant over a 10-year holding period. If purchased, the company will invest $600,000 in equity and finance the remainder with an interest-only loan that has a balloon payment due in year 10. The companys marginal income tax rate is 30% and the after-tax cash flow from sale of the property at the end of year 10 is expected to be $1,000,000. What is the incremental rate of return on equity to the company, if the property is owned instead of leased?

	Own	Lease
Sales	1,000,000	1,000,000
Cost of goods sold	300,000	300,000
Gross income	700,000	700,000
Operating expenses:
Business	150,000	150,000
Real Estate	40,000	40,000
Lease payments	0	145,000
Interest	90,000	0
Depreciation	50,000	0
Taxable income	370,000	365,000
Tax	111,000	109,500
Income after tax	259,000	255,500
Plus: Depreciation	50,000	0
After-tax cash flow	309,000	255,500