On January 3, 2016, the Walters Corporation signed a 10-year non-cancelable lease for manufacturing equipment. The fair value of the equipment at that time was $550,000. At the end of the lease period, the equipment, which has an estimated life of 15 years, will be returned to the lessor. Additional information is below:

Lease payments (year-end) $80,000

Walters Corporation's incremental borrowing rate 10%

Lessor's implicit interest rate (known to Walters) 12%

Present value factor for an ordinary annuity of 10 years at 10% 6.144567

Present value factor for an ordinary annuity of 10 years at 12% 5.650223

Walters should

a. capitalize the equipment at $550,000. b. capitalize the equipment at $491,565. c. capitalize the equipment at $452,018. d. not capitalize the equipment.