Suppose Proctorâ & Gambleâ (P&G) is considering purchasing
$ 13$13
million in new manufacturing equipment. If it purchases theâ equipment, it will depreciate it on aâ straight-line basis over the fiveâ years, after which the equipment will be worthless. It will also be responsible for maintenance expenses of
$ 1.50$1.50
million perâ year, paid in each of years 1 through 5.â Alternatively, it can lease the equipment for
$ 2.9$2.9
million per year for the fiveâ years, in which case the lessor will provide necessary maintenance. Assumeâ 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 equipmentâ (assuming it is a true taxâ lease) versus financing it with theâ lease-equivalent loan?
b. What is theâ break-even lease
ratelong dashâthat
âis, what lease amount couldâ P&G could pay each year and remain indifferent about whether it was leasing or financing aâ purchase?
Suppose Proctorâ & Gambleâ (P&G) is considering purchasing
$ 13$13
million in new manufacturing equipment. If it purchases theâ equipment, it will depreciate it on aâ straight-line basis over the fiveâ years, after which the equipment will be worthless. It will also be responsible for maintenance expenses of
$ 1.50$1.50
million perâ year, paid in each of years 1 through 5.â Alternatively, it can lease the equipment for
$ 2.9$2.9
million per year for the fiveâ years, in which case the lessor will provide necessary maintenance. Assumeâ 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 equipmentâ (assuming it is a true taxâ lease) versus financing it with theâ lease-equivalent loan?
b. What is theâ break-even lease
ratelong dashâthat
âis, what lease amount couldâ P&G could pay each year and remain indifferent about whether it was leasing or financing aâ purchase?
