Suppose Procter and Gamble (P&G) is considering purchasing 18 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 1.00 million per year. Alternatively, it can lease the equipment for 4.0 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 ratethat is, what lease amount could P&G pay each year and be indifferent between leasing and financing a purchase?

1a The NPV is million