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Assume that it is 2012 and Rearden Metal is considering the purchase of a new blast furnace costing a total of $5 million.This furnace will qualify for accelerated depreciation: 20% can be expensed immediately,followed by 32%,19.2%,11.52%,11.52% and 5.76% over the next five years.However,because of Rearden's substantial tax loss carryforwards,Rearden estimates its marginal tax rate to be only 10% over the next five years.Since Rearden will get very little tax benefit from the depreciation expense,they consider leasing the furnace instead.Suppose that Rearden and the lessor face the same 8% borrowing rate,but the lessor has a 40% marginal tax rate.Assume that the furnace is worthless after five years,the lease term is five years,and a lease would qualify as a true tax lease.
-Assuming that Rearden's annual lease payments are $1.2 million,then the effective after-tax lease borrowing rate is closest to:
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