Suppose Clorox can lease a new computer data processing system for $975,000 per year for five years. Alternatively, it can purchase the system for $4.25 million. Assume Clorox has a borrowing cost of 7.0% and a tax rate of 35%, and the system will be obsolete at the end of five years. a. If Clorox will depreciate the computer equipment on a straight-line basis over the next five years, and if the lease qualifies as a true tax lease, is it better to lease or finance the purchase of the equipment? b. Suppose that if Clorox buys the equipment, it will use accelerated depreciation for tax purposes. Speci cay suppose it can expense 20% of the purchase price immediately and can take depreciation deductions equal to 32%, 19.2% 11.52% 11.52%, and 5.76% of the purchase price over the next five years. Compare leasing with purchase in this case. a. If Clorox will depreciate the computer equipment on a straight-line basis over the next five years, and if the lease qualifies as a true tax lease, is it better to lease or finance the purchase of the equipment? If Clorox buys the equipment, it will pay $4 25 million upfront and have depreciation expenses of sper year. generating a depreciation tax shield of S per year for years 1-5. (Round to the nearest dollar) If it leases, the after-tax lease payments are (Round to the nearest dollar) fit leases, the FCF of leasing versus buying is sin year in years 1-4, and sin year 5. (Round to the nearest dollar) The NPV of Lease - Buy is (Round to the nearest dollar.) (Select from the drop-down menus.) Under these assumptions, the buy option is more attractive than the lease option b Suppose that if Clorox buys the equipment it will use accelerated depreciation for tax purposes. Speci caly suppose it can expense 20% of the purchase price immediately and can take depreciation deductions equal to 32%, 19 2%, 11.52%11.52%, and 5.76% of the purchase price over the next five years. Compare leasing with purchase in this case For each year, complete the table below: (Round to the nearest dollar.) b. Suppose that if Clorox buys the equipment, it will use accelerated depreciation for tax pur price immediately and can take depreciation deductions equal to 32%, 19.2%, 11.52%, 11.5 Compare leasing with purchase in this case Compare leasing with purchase in this case For each year, complete the table below: (Round to the nearest dollar.) Year Buy: Capital Expenditures Depreciation Tax Shield Free Cash Flow (Buy) Lease: Lease Payments Income Tax Savings Free Cash Flow (Lease) Lease vs. Buy Lease Buy (Round to the nearest dollar.) Year Buy: Capital Expenditures Depreciation Tax Shield Free Cash Flow (Buy) Lease Compare leasing with purchase in this case Depreciation Tax Shield Free Cash Flow (Buy) Lease: Lease Payments Income Tax Savings Free Cash Flow (Lease) Lease vs. Buy: Lease Buy (Round to the nearest dollar.) Year Buy: Capital Expenditures Depreciation Tax Shield Free Cash Flow (Buy) Lease: Lease Payments Income Tax Savings Free Cash Flow (Lease) Lease vs. Buy Lease Buy 2 Compare leasing with purchase in this case Free Cash Flow (Lease) Lease vs. Buy: Lease Buy (Round to the nearest dollar.) Year Buy Capital Expenditures Depreciation Tax Shield Free Cash Flow (Buy) Lease: Lease Payments Income Tax Savings Free Cash Flow (Lease) Lease vs. Buy: Lease Buy (Round to the nearest dollar.) Year Buy Capital Expenditures Depreciation Tax Shield 4 a. If Clorox will depreciate the computer equipment on a straight-line basis over the next five years, and if the lease qualifies as a lease or finance the purchase of the equipment? b. Suppose that if Clorox buys the equipment, it will use accelerated depreciation for tax purposes. Specifically, suppose it can ex price immediately and can take depreciation deductions equal to 32%, 19 2%, 11.52%, 11.52%, and 5 76% of the purchase price Compare leasing with purchase in this case Income Tax Savings Free Cash Flow (Lease) Lease vs. Buy Lease Buy (Round to the nearest dollar.) Year Buy: Capital Expenditures Depreciation Tax Shield Free Cash Flow (Buy) Lease: Lease Payments Income Tax Savings Free Cash Flow (Lease) $ Lease vs. Buy Lease Buy The NPV of Lease-Buy is S (Round to the nearest dollar) Select from the drop-down menus.) Under these assumptions, the buy option is more attractive than the lease option. Suppose Clorox can lease a new computer data processing system for $975,000 per year for five years. Alternatively, it can purchase the system for $4.25 million. Assume Clorox has a borrowing cost of 7.0% and a tax rate of 35%, and the system will be obsolete at the end of five years. a. If Clorox will depreciate the computer equipment on a straight-line basis over the next five years, and if the lease qualifies as a true tax lease, is it better to lease or finance the purchase of the equipment? b. Suppose that if Clorox buys the equipment, it will use accelerated depreciation for tax purposes. Speci cay suppose it can expense 20% of the purchase price immediately and can take depreciation deductions equal to 32%, 19.2% 11.52% 11.52%, and 5.76% of the purchase price over the next five years. Compare leasing with purchase in this case. a. If Clorox will depreciate the computer equipment on a straight-line basis over the next five years, and if the lease qualifies as a true tax lease, is it better to lease or finance the purchase of the equipment? If Clorox buys the equipment, it will pay $4 25 million upfront and have depreciation expenses of sper year. generating a depreciation tax shield of S per year for years 1-5. (Round to the nearest dollar) If it leases, the after-tax lease payments are (Round to the nearest dollar) fit leases, the FCF of leasing versus buying is sin year in years 1-4, and sin year 5. (Round to the nearest dollar) The NPV of Lease - Buy is (Round to the nearest dollar.) (Select from the drop-down menus.) Under these assumptions, the buy option is more attractive than the lease option b Suppose that if Clorox buys the equipment it will use accelerated depreciation for tax purposes. Speci caly suppose it can expense 20% of the purchase price immediately and can take depreciation deductions equal to 32%, 19 2%, 11.52%11.52%, and 5.76% of the purchase price over the next five years. Compare leasing with purchase in this case For each year, complete the table below: (Round to the nearest dollar.) b. Suppose that if Clorox buys the equipment, it will use accelerated depreciation for tax pur price immediately and can take depreciation deductions equal to 32%, 19.2%, 11.52%, 11.5 Compare leasing with purchase in this case Compare leasing with purchase in this case For each year, complete the table below: (Round to the nearest dollar.) Year Buy: Capital Expenditures Depreciation Tax Shield Free Cash Flow (Buy) Lease: Lease Payments Income Tax Savings Free Cash Flow (Lease) Lease vs. Buy Lease Buy (Round to the nearest dollar.) Year Buy: Capital Expenditures Depreciation Tax Shield Free Cash Flow (Buy) Lease Compare leasing with purchase in this case Depreciation Tax Shield Free Cash Flow (Buy) Lease: Lease Payments Income Tax Savings Free Cash Flow (Lease) Lease vs. Buy: Lease Buy (Round to the nearest dollar.) Year Buy: Capital Expenditures Depreciation Tax Shield Free Cash Flow (Buy) Lease: Lease Payments Income Tax Savings Free Cash Flow (Lease) Lease vs. Buy Lease Buy 2 Compare leasing with purchase in this case Free Cash Flow (Lease) Lease vs. Buy: Lease Buy (Round to the nearest dollar.) Year Buy Capital Expenditures Depreciation Tax Shield Free Cash Flow (Buy) Lease: Lease Payments Income Tax Savings Free Cash Flow (Lease) Lease vs. Buy: Lease Buy (Round to the nearest dollar.) Year Buy Capital Expenditures Depreciation Tax Shield 4 a. If Clorox will depreciate the computer equipment on a straight-line basis over the next five years, and if the lease qualifies as a lease or finance the purchase of the equipment? b. Suppose that if Clorox buys the equipment, it will use accelerated depreciation for tax purposes. Specifically, suppose it can ex price immediately and can take depreciation deductions equal to 32%, 19 2%, 11.52%, 11.52%, and 5 76% of the purchase price Compare leasing with purchase in this case Income Tax Savings Free Cash Flow (Lease) Lease vs. Buy Lease Buy (Round to the nearest dollar.) Year Buy: Capital Expenditures Depreciation Tax Shield Free Cash Flow (Buy) Lease: Lease Payments Income Tax Savings Free Cash Flow (Lease) $ Lease vs. Buy Lease Buy The NPV of Lease-Buy is S (Round to the nearest dollar) Select from the drop-down menus.) Under these assumptions, the buy option is more attractive than the lease option