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Equipment versus financing it with lease equivalent loan

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Reference no: EM131387943

Suppose Procter and Gamble (P&G) is considering purchasing $10 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 $1.75 million per year. Alternatively, it can lease the equipment for$2.3 million per year for the five years, in which case the lessor will provide necessary maintenance. Assume P&G?s tax rate is 35% 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?

Reference no: EM131387943

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