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Suppose Proctor amp; Gamble (Pamp;G) is considering purchasing $ 19 million in new manufacturing equipment.
Suppose Proctor & Gamble (P&G) is considering purchasing $ 19 million in new manufacturing equipment. If it purchases the equipment, it will depreciate it for tax purposes on a straight-line basis over five years, after which the equipment will be worthless. It will also be responsible for maintenance expenses of $ 1.00 million per year, paid in each of years 1 through 5. It can also lease the equipment under a true tax lease for $4.7million per year for the five years, in which case the lessor will provide necessary maintenance. Assume P&G's tax rate is 40 % and its borrowing cost is 6.0 %
b. What is the break-even lease rate that is, what lease amount could P&G pay each year and be indifferent between leasing and financing a purchase?
