A company is planning to move to a larger office and is trying to decide if the new office should be owned or leased. Cash flows for owning versus leasing are estimated as follows. Assume that the cash flows from operations will remain level over a 10-year holding period. If purchased, the company will make an equity investment 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 $800,000. What would the initial equity investment have to be to generate a 15% incremental rate of return on equity with owning instead of leasing?

	Own	Lease
Sales	800,000	800,000
Costs of Goods Sold	350,000	350,000
Gross Income	450,000	450,000
Operating Expenses:
Business	85,000	85,000
Real Estate	45,000	45,000
Lease Payments	0	125,000
Interest	60,000	0
Depreciation	40,000	0
Taxable Income	220,000	195,000
Tax	66,000	58,500
Income After Tax	154,000	136,500
Plus: Depreciation	40,000	0
After-Tax Cash Flow	194,000	136,500