The GO PRO Company is planning to launch a new product line. The equipment needed to produce the new cameras will cost $1 million, with a lifetime of five years, and no salvage value. The company's tax rate is 40%, and the equipment would be depreciated using straight-line depreciation over five years. Alternatively, the company could rent the equipment instead, for five years, at a cost of $250,000 per year, payable at the end of each year.

(a) If the company decides to rent the equipment, what would be the after-tax cost of the money made available by renting? (Hint: This is the incremental rate of return corresponding to the difference between renting and buying. Remember that rented equipment cannot be depreciated, but rental payments are tax-deductible.)

(b) Now revise your answer to part (a) above to reflect the assumption that the rental payments will inflate by 10% per year (i.e., starting at $275,000 in year 1). Explain.