Suppose Clorox can lease a new computer data processing system for$980,000per year for five years. Alternatively, it can purchase the system for$4.27million. Assume Clorox has a borrowing cost of6.6%and a tax rate of35%,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. Specifically, 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