The Decision to Lease or Buy at Warf Computers Ltd$.$

Warf Computers Ltd$.$ 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 $$4$ million. Because of the rapid development of new technology, the equipment

falls in CCA class $8$ for depreciation. At the end of four years, the market value of the equipment is expected to be $$480,000.$

Alternatively, the company can lease the equipment from Hendrix Leasing. The lease contract calls for four annual payments of

$$1,040,000,$ due at the beginning of the year. Additionally, Warf Computers must make a security deposit of $$240,000$ that will be

returned when the lease expires. Warf Computers can issue bonds with a yield of $11$ percent, and the company has a marginal tax

rate of $35$ percent.

Should Warf buy or lease the equipment? Find the NPV$?$