Clorox Company Case Study Help Analysis With Solution

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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, and if the lease qualifies as a true tax lease, is it better to lease or finance the purchase of the equipment?

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b. Suppose that if Clorox buys the equipment, it will use accelerated depreciation for tax purposes. Specifically, suppose it can expense 20% of the purchase price immediately and can take depreciation deductions equal to 32%, 19.2%, 11.52%, 11.52%, and 5.76% of the purchase price over the next five years. Compare leasing with purchase in this case.

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