27. Suppose the Prudential Insurance Co. is looking for a safe, long-term investment that will earn 6%. Further assume that Ford Motor Company wants to acquire a number of special purpose railroad cars to transport new automobiles to distribution hubs around the country. Ford wants to buy railroad cars valued at a total of $50 million and expects them to last 20 years after which they will be essentially worthless. Prudential considers the investment relatively safe because there’s an active market for used railroad cars. It is therefore willing to buy the cars and lease them to Ford.

a. What annual lease payment should Prudential ask of Ford to achieve its targeted 6%

return on a 20-year lease? Assume lease payments will be made at the end of each year.

b. Suppose Ford wants to take the lease but is unwilling to pay more than $4 million per year. What will be Prudential’s return if it agrees to Ford’s terms?