Paragon Security is considering the purchase of a new machine, which will cost a total of $5 million. The tax authority approves that the new machine can use the accelerated depreciation: Paragon Security can depreciate 25% of the value of the machine right after the purchase, and depreciate 35%, 15%, 15%, 5% and 5% in the next five years. Due to technical reasons, the machine is worthless after five years. According to a special tax policy, the marginal tax rate for Paragon Security will be 12% in the above period. Assume that the cost of debt for Paragon Security is 8%. If Paragon Security uses this machine through a true tax lease for five years, instead of direct purchasing, the annual lease payments will be $1.1 million. The effective after-tax lease borrowing rate is closest to:

a.

3%

b.

4.5%

c.

7.5%

d.

6%