Suppose Proctor & Gamble (P&G) is considering purchasing

$ 13$13

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

$ 1.50$1.50

million per year, paid in each of years 1 through 5. Alternatively, it can lease the equipment for

$ 2.9$2.9

million per year for the five years, in which case the lessor will provide necessary maintenance. Assume P&G's tax rate is

35 %35%

and its borrowing cost is

6.0 %6.0%.

a. What is the NPV associated with leasing the equipment (assuming it is a true tax lease) versus financing it with the lease-equivalent loan?

b. What is the break-even lease

ratelong dashthat

is, what lease amount could P&G could pay each year and remain indifferent about whether it was leasing or financing a purchase?