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Should warf buy or lease the equipment and why

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Nick Warf, the company president, has found a vendor for the equipment. Clapton Acous- tical Equipment has offered to sell Warf Computers the necessary equipment at a price of $6.1 million. Because of the rapid development of new technology, the equipment falls in the three-year MARCS depreciation class. At the end of four years, the market value of the equipment is expected to be $780,000.

  • Alternatively, the company can lease the equipment from Hendrix Leasing. The lease contract calls for four cannula payments of $1.48 million, due at the beginning of the year. Additionally, Warf Computers must make a security deposit of $400,000 that will be returned when the lease expires. Warf Computers can issue bonds with a yield of 9 percent and the company has a marginal tax rate of 21 percent.

Problem 1: Should Warf buy or lease the equipment? Why?

Reference no: EM132958910

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