Suppose Procter and Gamble (P&G) is considering purchasing $19 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 $ 2.00 million per year. Alternatively, it can lease the equipment for$ 4.4 million per year for the five years, in which case the lessor will provide necessary maintenance. Assume P&G?s tax rate is 30 %and its borrowing cost is 7.0 %.

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 rate that is, what lease amount could P&G pay each year and be indifferent between leasing and financing a purchase?

CORRECT SOLUTIONS:

a) 6.10 m$

b) 6.31 m$

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