Suppose Procter and Gamble (P&G) is considering purchasing $20 million in new manufacturing equipment. If it purchases the equipment, it will depreciate it on a straight-line basis over the five years, after which the equipment will be worthless. It will also be responsible for maintenance expenses of $1.25 million per year. Alternatively, it can lease the equipment for $4.6 million per year for the five years, in which case the lessor will provide necessary maintenance. Assume P&G?s tax rate is 30% and its borrowing cost is 7.0%.
a. What is the NPV associated with leasing the equipment versus financing it with the lease equivalent loan?
The NPV is $_____million. (Round to two decimal places.)
Under these assumptions, leasing is (less or more) attractive than financing a purchase of the equipment.
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?
The break-even lease rate is $_____million. (Round to two decimal places.)
a. The NPV is $-18,667,435.83 under Purchase option.
The NPV is $-13,202,624 under Leasing option.
Under these assumptions, leasing is more attractive than financing a purchase of the equipment.
b. The break-even lease rate is $6,504,019.84
Suppose Procter and Gamble (P&G) is considering purchasing $20 million in new manufacturing equipment. If it...
Suppose Procter and Gamble (P&G) is considering purchasing $ 13 million in new manufacturing equipment. If it purchases the equipment, it will depreciate it on a straight-line basis over the five years, after which the equipment will be worthless. It will also be responsible for maintenance expenses of $ 0.50 million per year. Alternatively, it can lease the equipment for $ 3.0 million per year for the five years, in which case the lessor will provide necessary maintenance. Assume P&G?s...
Suppose Proctor? & Gamble? (P&G) is considering purchasing $15 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 ?$4.1 million per year for the five? years,...
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Suppose Clorox can lease a new computer data processing system for 971,000 per year for five years. Alternately it can purchase the system for 4.22 million. Assume Clorox has a borrowing cost of 6.7% and a tax rate of 35% and the system will be obsolete at the end of two years. A. If Clorox will depreciate the computer equipment on a straight line basis over the next five years, and if the lease qualifies a true tax lease qualifies...