Advanced 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 key board. Because of the required sensitivity of the microphone and its small size, the company needs specialized equipment for production.

Lucas Johnson, the company president, has found a vendor for the equipment. Memtech Acoustical Equipment has offered to sell Advanced Computers the necessary equipment at a price of $4.3 million. Because of the rapid development of new technology, the equipment will be fully depreciated after four years with the straight line depreciation approach. At the end of the fourth year, the market value of the equipment is expected to be $450,000.

Alternatively, the company can lease the equipment. Two leasing companies, Hendrix Leasing and International Leasing Corporation, offered their leasing terms to Advanced Computers. Hendrix proposed the following lease contract: The lease contract calls for monthly payment of $90,000 due at the beginning of each month for four years. Additionally, Advanced Computers must make a security deposit $200,000 at the beginning of the lease contract (i.e. at the beginning of the first month) and the deposit will be returned when the lease expires at the end of the last month.

International Leasing Corporation proposed the following lease contract: The lease contract calls for monthly payment of $91,500 due at the beginning of each month for four years without security deposit.

Advanced Computers can borrow a loan with the interest rate of 10% per year from a bank to finance the equipment. The company has a marginal tax rate of 21%. Questions: Write up a one-page memo to summarize the issue and your quantitative analysis. Based on your analysis, please make recommendations about whether Advanced Computers should buy or lease the equipment. If they decide to lease the equipment, which leasing company should they choose and why? What are benefits brought by the leasing contracts to Hendrix Leasing and International Leasing, respectively? You are supposed to be a financial analyst in Advanced Computers and the memo is addressed to the president Lucas Johnson.