Question
Suppose P&G is considering purchasing $16 million in new manufacturing equipment. If it purchases the equipment, it will depreciate it for tax purposes on a
Suppose P&G is considering purchasing $16 million in new manufacturing equipment. If it purchases the equipment, it will depreciate it for tax purposes on a straight-line basis over five years, after which the equipment will be worthless. It will also be responsible for maintenance expenses of $1 million per year, pain in each of years 1 through 5, It can also lease the equipment under a true tax lease 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 40%, it's borrowing costs is 6.5%, and that the tax deductibility benefit of the lease payments occurs at the same time as when the lease payment is made.
a. What is the NPV associated with leasing the equipment versus borrowing and buying it? Round to nearest dollar
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 buying through borrowing.
b.
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