Question
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
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
$0.50
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
35%
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?
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started