Suppose Proctor? & Gamble? (P&G) is considering purchasing $12 million in new manufacturing equipment. If it purchases...

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Suppose Proctor? & Gamble? (P&G) is consideringpurchasing $12 million in new manufacturing equipment. If itpurchases the? equipment, it will depreciate it for tax purposes ona? straight-line basis over five? years, after which the equipmentwill be worthless. It will also be responsible for maintenanceexpenses of $1.00 million per? year, paid in each of years 1through 5. It can also lease the equipment under a true tax leasefor ?$3.3 million per year for the five? years, in which case thelessor will provide necessary maintenance. Assume? P&G's taxrate is 30% and its borrowing cost is 6.0%.
a. What is the NPV associated withleasing the equipment versus financing it with the?lease-equivalent loan?
b. What is the? break-even lease rate - that?is, what lease amount could? P&G pay each year and beindifferent between leasing and financing a? purchase?

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Part a Step 1 Calculate Free Cash Flow Associated with Purchase and Lease of Equipment The value of free cash flow for each year associated with purchase is calculated as below Annual Free Cash Flow Purchase 1 2 3 4 5 Depreciation Tax Shield 12000000530 720000 720000 720000 720000 720000 Less AfterTax Maintenance Expenses 1000000130 700000 700000 700000 700000 700000 Annual Free Cash Flow Purchase 20000 20000 20000 20000 See Answer

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Suppose Proctor? & Gamble? (P&G) is consideringpurchasing $12 million in new manufacturing equipment. If itpurchases the? equipment, it will depreciate it for tax purposes ona? straight-line basis over five? years, after which the equipmentwill be worthless. It will also be responsible for maintenanceexpenses of $1.00 million per? year, paid in each of years 1through 5. It can also lease the equipment under a true tax leasefor ?$3.3 million per year for the five? years, in which case thelessor will provide necessary maintenance. Assume? P&G's taxrate is 30% and its borrowing cost is 6.0%.a. What is the NPV associated withleasing the equipment versus financing it with the?lease-equivalent loan?b. What is the? break-even lease rate - that?is, what lease amount could? P&G pay each year and beindifferent between leasing and financing a? purchase?