Suppose that Don Little Inc., wants to acquire a piece of equipment costing $10,000 for use in the fabrication of microprocessors. A leasing company is willing to finance the equipment with a 5-year true lease. The terms of the lease call for an annual payment of $2,500. The lease payments are made at the end of each of the 5 years. For simplicity, assume a five-year straight line depreciation will be used for the equipment, and after 5 years, the machine will be worthless. Don Little is liable to pay tax of 34% and the cost of debt is 7.57%,

a. Prepare the incremental cash flow schedule for Don Little Inc from leasing instead of buying?

b. What is the implicit after-tax interest rate on the lease?

c. Which option (please clarify is a cheaper source of financing?