Suppose Procter and Gamble(P&G) is considering purchasing $10 million in new manufacturing equipment. If it purchases theequipment, it will depreciate it on astraight-line basis over the fiveyears, 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 fiveyears, in which case the lessor will provide necessary maintenance. AssumeP&G?s tax rate is 35%

and its borrowing cost is 7.0%.

a. What is the NPV associated with leasing the equipment versus financing it with the lease equivalentloan?

b. What is thebreak-even lease ratethat is, what lease amount couldP&G pay each year and be indifferent between leasing and financing apurchase?