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(1) 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 30% and its borrowing cost is 6.0%. 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 ratethat is, what lease amount could P&G pay each year and be indifferent between leasing and financing a purchase? (2) Suppose Amazon is considering the purchase of computer servers and network infrastructure to expand its very successful business offering cloud-based computing. In total, it will purchase $48.6 million in new equipment. This equipment will qualify for accelerated depreciation: 20% can be expensed immediately, followed by 32%, 19.2%, 11.52%, 11.52%, and 5.76% over the next five years. However, because of the firm's substantial loss carryforwards and other credits, Amazon estimates its marginal tax rate to be 10% over the next five years, so it will get very little tax benefit from the depreciation expenses. Thus, Amazon considers leasing the equipment instead. Suppose Amazon and the lessor face the same 8.2% borrowing rate, but the lessor has a 35% tax rate. For the purpose of this question, assume the equipment is worthless after five years, the lease term is five years, and the lease qualifies as a true tax lease. a. What is the lease rate for which the lessor will break even? b. What is the gain to Amazon with this lease rate? c. What is the source of the gain in this transaction? Suppose Amazon is considering the purchase of computer servers and network infrastructure to expand its very successful business offering cloud-based computing. In total, it will purchase $47.3 million in new equipment. This equipment will qualify for accelerated depreciation: 20% can be expensed immediately, followed by 32%. 19.2%. 11.52%. 11.52%. and 5.76% over the next ve years. However, because of the rm?s substantial loss can'yfonlvards and other credits, Amazon estimates its marginal tax rate to be 10% over the next ve years, so it will get very little tax benet from the depreciation expenses. Thus, Amazon considers leasing the equipment instead. Suppose Amazon and the lessor face the same 7.8% borrowing rate, but the lessor has a 35% tax rate. For the purpose of this question, assume the equipment is worthless after ve years, the lease term is ve years, and the lease qualies as a true tax lease. a. What is the lease rate for which the lessor will break even? b. What is the gain to Amazon with this lease rate? c. What is the source of the gain in this transaction? 3. What is the lease rate for which the lessor will break even? To compute this amount, rst we compute the FCF from buying the machine. The depreciation tax shield is 0.35X$47.3 millionx 20% = $3.311 million in year 0.35 X $47.3 million X 32% = $5.298 million in year 1, etc. The FCF are shown below ($ million): Year 0 1 2 Buy: Capital Expenditures $ (47.300) $ 0 $ 0 Depreciation Tax Shield 3.311 5.298 3.179 FreeCash Flow(Buy) $ (43.989) $ 5.298 $ 3.179 Year 3 4 5 Buy: Capital Expenditures $ 0 $ 0 $ 0 Depreciation Tax Shield 1.907 1.90? 0.954 Free Cash Flow (Buy) $ 1.907 $ 1.907 $ 0.954 1 NPV of the FCF from buying the machine is ($ million): N FCFt NPV= (1 +10? va: M3.989+++++= -532113 (1 + 0.0507)\"I (1 + 0.0507)2 (1 + 0.0507)3 (1 + 0.0507)4 (1 + 0.050735 Therefore, to break-even, the PV of the after-tax lease payments must equal $32.113 million. and we solve for the lease payment L: $32113 million = LX (1 -16) x [1+1F[1' (13MB 1 $32113 million=L>