10 May WHAT IS THE NPV ASSOCIATED WITH LEASING THE EQUIPMENT VERSUS FINANCING IT WITH THE LEASE EQUIVALENT?
Suppose Procter and Gamble (P&G) is considering purchasing $ 12 million in new manufacturing equipment. If it purchases the? equipment it will depreciate it on a? straight-line basis over the five? years after which the equipment will be worthless. It will also be responsible for maintenance expenses of$1.50 million per year.? Alternatively it can lease the equipment for $2.7 million per year for the five? years in which case the lessor will provide necessary maintenance. Assume? P&G?s tax rate is40% and its borrowing cost is6.0%.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 dash—that ?is what lease amount could? P&G pay each year and be indifferent between leasing and financing a? purchase? please show how you derived at the answers.
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