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 $ 4.15 million. Clorox has a borrowing cost of 7% and a tax rate of 35%. Assume that the system will be obsolete at the end of five years, and that the tax deductibility benefit of the lease payments occurs at the time the lease payments are made.

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 for tax purposes. Specifically, the CCA rate will be 40%. Assume that the fabricator has no residual value at the end of the five years and you can use the PV(CCATS) formula. Compare leasing with purchase in this case.

a.Choose the correct answer below.

(Round to the nearest dollar.)

A. Lease the equipment because the NPV of the lease minus buy is ?

.

B. Finance the purchase of the equipment because the NPV of the lease minus buy is ?

b. Choose the correct answer below.

(Round to the nearest dollar.)

A.Lease the equipment because the NPV of the lease minus buy is ?

B.Finance the purchase of the equipment because the NPV of the lease minus buy is ?