why the effective after-tax lease borrowing rate higher than Riverton's actual after-tax borrowing rate so the lease is not attractive?

thanks a lot

7. Riverton Mining plans to purchase or lease $220,000 worth of excavation equipment. If pur- chased, the equipment will be depreciated on a straight-line basis over five years, after which it will be worthless. If leased, the annual lease payments will be $55,000 per year for five years. Assume Riverton's borrowing cost is 8%, its tax rate is 35%, and the lease qualifies as a true tax lease. a. If Riverton purchases the equipment, what is the amount of the lease-equivalent loan? b. Is Riverton better off leasing the equipment or financing the purchase using the lease- equivalent loan? c. What is the effective after-tax lease borrowing rate? How does this compare to Riverton's actual after-tax borrowing rate? a. If Riverton buys the equipment, it will pay $220,000 upfront, and have depreciation expenses of 220,000 75 = $44,000 per year, generating a depreciation tax shield of 35% * 44,000 = $15,400 per year for years 1-5. If it leases, the after-tax lease payments are $55,000 + (1 - .35) = $35,750. Thus, the FCF of leasing versus buying is 35,750 (-220,000) = 184,250 in year 0, -35,750 (15,400) = -51,150 in years 1-4, and 0 - (15,400) = -15,400 in year 5. The initial amount of the lease equivalent loan is the PV of the incremental free cash flows in years 1-5 at Riverton's after-tax borrowing rate of 8%(1 - .35) = 5.2%: -51,150 -51,150 Loan Amt = -51,150 -51,150 -15,400 1.052 * 1.0522 * 1.0523 * 1.0524 1.0523 = -192,488 That is, leasing leads to the same future cash flows as buying the equipment and borrowing $192,488 initially. b. If Riverton leases, it pays $35,750 after-tax as an initial lease payment. If it buys using the lease equivalent loan, it pays 220,000 192,488 = $27,512 upfront. Because the future liabilities are the same, buying with the lease equivalent loan is cheaper by 35,750 27,512 = $8,238 today. Thus, the lease is not attractive. C. We compute the effective after-tax lease borrowing rate as the IRR of the incremental FCF calculated in kla): 184,250; -51,150; 51,150; -51,150; -51,150; -15,400. Using Excel, we find the IRR is 7.0%) which is higher than Riverton's actual after-tax borrowing rate of 8% *(1 - .35) = 5.2%. Thus, the lease is not attractive