Problem:
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 $4.25 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 the computer equipment on a straight-line basis over the next five years, is it better to lease or finance the purchase of the equipment?