Suppose Proctor& Gamble(P&G) is considering purchasing $ 10

$10 million in new manufacturing equipment. If it purchases theequipment, it will depreciate it for tax purposes on astraight-line basis over fiveyears, after which the equipment will be worthless. It will also be responsible for maintenance expenses of $ 1.00

$1.00 million peryear, paid in each of years 1 through 5. It can also lease the equipment under a true tax lease for $2.7

2.7 million per year for the fiveyears, in which case the lessor will provide necessary maintenance. AssumeP&G's tax rate is 40 %

40%, its borrowing cost is 7.5 %

7.5%, and that the tax deductibility benefit of the lease payments occurs at the same time as when the lease payment is made.(Note: the help file for this question does not make this timingassumption)

a. What is the NPV associated with leasing the equipment versus borrowing and buyingit?

b. What is thebreak-even lease ratelong dash

that is, what lease amount couldP&G pay each year and be indifferent between leasing and buying throughborrowing?