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Homework answers / question archive / Suppose Procter and Gamble? (P&G) is considering purchasing 18 million in new manufacturing equipment

Suppose Procter and Gamble? (P&G) is considering purchasing 18 million in new manufacturing equipment

Finance

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

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