Suppose Proctor& Gamble(P&G) is considering purchasing $14 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 million peryear, paid in each of years 1 through 5. It can also lease the equipment under a true tax lease for $3.7 million per year for the fiveyears, in which case the lessor will provide necessary maintenance. AssumeP&G's tax rate is 40% and its borrowing cost is 6.5%.

a. What is the NPV associated with leasing the equipment versus financing it with thelease-equivalent loan?

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