11 Warf Computers has decided to proceed with the manufacture and distribution of the virtual keyboard (VK)

the company has developed. To undertake this venture, the company needs to obtain equipment for the production of the microphone for the keyboard. Because of the required sensitivity of the microphone and its small size, the company needs specialized equipment for production.

Nick Warf, the company president, has found a vendor for the equipment. Clapton Acoustical Equipment has offered to sell Warf Computers the necessary equipment at a price of £5 million. The equipment will be depreciated using the straight line method. At the end of four years, the market value of the equipment is expected to be zero.

Alternatively, the company can lease the equipment from Hendrix Leasing. The lease contract calls for four annual payments of £1.3 million due at the beginning of the year, with a balloon payment at the end of the contract to offset any financial liability. Warf Computers can issue bonds with a yield of 11 per cent, and the company has a marginal tax rate of 18 per cent.

Should Warf buy or lease the equipment?