Leasing: Net Present Value Answer to A and B

Suppose Clorox can lease a new computer data processing system for $950,000 per year for five years. Alternatively, it can purchase the system for $4.35 million. Assume Clorox has a borrowing cost of 6% and a tax rate of 35%, and the system will be obsolete at the end of five years. a. If Clorox will depreciate (for tax purposes) 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 finance the purchase of the equipment or to lease it? b. Suppose that if Clorox buys the equipment, it will use accelerated depreciation or tax purposes Specifical , the C rate il be 40% and an undepreciated Capita? cost in year 6 will be taken as a terminal loss. Compare leasing with purchase in this case. a. Choose the correct answer below. Round to the nearest dollar.) 0 A. Finance the equipment because the NPV of the lease minus buy is $ O B. Lease the purchase of the equipment because the NPV of the lease minus buy is $