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 $4.35 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 fiveyears, 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 taxpurposes) the computer equipment on astraight-line basis over the next five years and if the lease qualifies as a true taxlease, is it better to finance the purchase of the equipment or to leaseit?

b. Suppose that if Clorox buys theequipment, it will use accelerated depreciation for tax purposes.Specifically, the CCA rate will be 45%. Assume that the fabricator has no residual value at the end of the five years and you can use thePV(CCATS) formula. Compare leasing with purchase in this case.