WF Computers is looking to manufacture and distribute the virtual keyboard. The company is looking for venture to obtain equipments for the production of microphones for keyboard. Considering the sensitivity issue, WF Company will require specialized equipment for its production process. Later, WF Company found a seller for the equipment who is willing to sell the equipment for $6.1 million. After 3 years the equipment falls in three years MACRS depreciation class. The equipment value became $780,000. Alternatively, WF is looking to lease the equipment from HR Leasing Company. The lease agreement states that there is a four annual payment of $1.48 million due at the opening of the year. WF Company must make a security deposit of $400,000 and can issue bonds with a yield of 11%. To determine : The manner by which the inclusion of cancellation option affects the leasing value. Introduction: Lease: An asset can be leased or purchased. A lease in a contractual agreement made between two parties; lessor and lessee. The agreement explains the use of asset for a particular time by lessee. In return, lessor gets periodical payments for the use of asset.

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Chapter 27, Problem 4M

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Case summary:

WF Computers is looking to manufacture and distribute the virtual keyboard. The company is looking for venture to obtain equipments for the production of microphones for keyboard. Considering the sensitivity issue, WF Company will require specialized equipment for its production process. Later, WF Company found a seller for the equipment who is willing to sell the equipment for $6.1 million. After 3 years the equipment falls in three years MACRS depreciation class.

The equipment value became $780,000. Alternatively, WF is looking to lease the equipment from HR Leasing Company. The lease agreement states that there is a four annual payment of $1.48 million due at the opening of the year. WF Company must make a security deposit of $400,000 and can issue bonds with a yield of 11%.

To determine: The manner by which the inclusion of cancellation option affects the leasing value.

Introduction:

Lease: An asset can be leased or purchased. A lease in a contractual agreement made between two parties; lessor and lessee. The agreement explains the use of asset for a particular time by lessee. In return, lessor gets periodical payments for the use of asset.

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