Suppose Proctor& Gamble(P&G) is considering purchasing $17 million in new manufacturing equipment. If it purchases theequipment, it will depreciate it for tax purposes on astraiht-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 $4.4 million per year for the fiveyears, in which case the lessor will provide necessary maintenance. AssumeP&G's tax rate is 30 %, its borrowing cost is 7.5 %, and that the tax deductibility benefit of the lease payments occurs at the same time as when the lease payment is made.

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

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