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 7% and a tax rate of 35%, and the system will be obsolete at the end of five years.

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 40% and any undepreciated capital cost in year 6 will be taken as a terminal loss. Compare leasing with purchase in this case.