Bellevue restaurant is considering to purchase or lease $220,000 worth of kitchen equipment.

The company has received an offer from a local bank for a leasing contract: according to the offer, the annual lease payments will be $55,000 per year for five years. Assume that the cost of debt for the restaurant is 8%, its tax rate is 35%, and the lease qualifies as a true tax lease.

Alternatively, the restaurant could buy directly the equipment, that then would be depreciated on a straight-line basis over five years, after which it will be worthless.

1. If Bellevue purchases the equipment, what is the amount of the lease-equivalent loan?
2. Is Bellevue better off leasing the equipment or financing the purchase using the lease equivalent loan?
3. What is the effective after-tax lease borrowing rate? How does this compare to Bellevue's actual after-tax borrowing rate?