The Decision to Lease or Buy at Warf Computers 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 $ 7.93 million . Because of the rapid development of new technology , the equipment falls in the three - year MACRS depreciation class . At the end of four years , the market value of the equipment is expected to be $ 1.02 million . Alternatively , the company can lease the equipment from Hendrix Leasing . The lease contract calls for four annual payments of $ 1.924 million , due at the beginning of each year . Additionally , Warf Computers must make a security deposit of $ 520,000 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 21 percent . 1. Should Warf buy or lease the equipment ? 2. Nick mentions to James Hendrix , the president of Hendrix Leasing , that although the company will need the equipment for four years , he would like a lease contract for two years instead . At the end of the two years , the lease could be renewed . Nick also would like to eliminate the security deposit , but he would be willing to increase the lease payments to $ 2,307,500 for each of the two years . When the lease is renewed in two years . Hendrix would consider the increased lease payments in the first two years when calculating the terms of the renewal . The equipment is expected to have a market value of $ 4.2 million in two years . What is the NAL of the lease contract under these terms ? Why might Nick prefer this lease ? What are the potential ethical issues concerning the new lease terms ? 3. In the leasing discussion , James informs Nick that the contract could include a purchase option for the equipment at the end of the lease . Hendrix Leasing offers three purchase options : a . An option to purchase the equipment at the fair market value . b . An option to purchase the equipment at a fixed price . The price will be negotiated before the lease is signed . c . An option to purchase the equipment at a price of $ 500,000 . How would the inclusion of a purchase option affect the value of the lease ? 4. James also informs Nick that the lease contract can include a cancellation option . The cancellation option would allow Warf Computers to cancel the lease on any anniversary date of the contract . In order to cancel the lease . Warf Computers would be required to give 30 days ' notice prior to the anniversary date . How would the inclusion of a cancellation option affect the value of the lease ?