Penn Medical Center, a for-profit entity, is considering the purchase of a 64-slice CT scanner. The cost of the scanner is $5 million. The scanner would be depreciatied over 10 years on a straight line basis to a zero salvage value. The tax rate is 40%. The financing options include either borrowing for the full cost of the scanner or leasing a scanner. The lease option is a 5-year lease with equal before-tax lease payments of $999,000 per year. The borrowing alternative is a 5-year loan covering the entire cost of the scanner at an interest rate of 5% which is also the implied lease rate. The after-tax cost of debt is 3%.

a. Calculate the total cost to purchase the CT scanner over 5 years .

b. Calculate the total cost to lease the CT scanner over 5 years .

c. Should Penn Medical purchase or lease the CT scanner? . You will enter PURCHASE or LEASE for your answer.