Suppose Proctor? & Gamble? (P&G) is considering purchasing $14 million in new manufacturing equipment. If...
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Suppose Proctor? & Gamble? (P&G) is considering purchasing $14 million in new manufacturing equipment. If it purchases the? equipment, it will depreciate it for tax purposes on a? straight-line basis over five? years, after which the equipment will be worthless. It will also be responsible for maintenance expenses of $1.00 million per? year, paid in each of years 1 through 5. It can also lease the equipment under a true tax lease for $3.4 million per year for the five? years, in which case the lessor will provide necessary maintenance. Assume? P&G's tax rate is 40% and its borrowing cost is 6.5%.
a. What is the NPV associated with leasing the equipment versus financing it with the? lease-equivalent loan?
b. What is the? break-even lease ratelong dashthat is, what lease amount could? P&G pay each year and be indifferent between leasing and financing a? purchase
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