Sumeet Computers is planning to manufacture keyboards. The keyboard needs a microphone, which the firm can easily produce. But there is a problem that in view of fast-changing technology, the price of...

Sumeet Computers is planning to manufacture keyboards. The keyboard needs a microphone, which the firm can easily produce. But there is a problem that in view of fast-changing technology, the price of the microphone-manufacturing equipment is expected to fall drastically. During past 3 years, it fell from Rs 4 million to Rs 5,00,000. This is the reason that Sumeet Computers does not like to purchase the microphone manufacturing equipment. It finds out an alternative of leasing the equipment. The lease contract involves three annual payments of Rs 1.5 million due at the beginning of the year. There is also involved a security money of Rs 250,000 that will be returned at the expiry of the lease. The firm has the option of buying the equipment at the expiry of the lease either at the fair market value or at a fixed price. There is also a provision that the lease can be cancelled in the midway. The company can issue bonds with a yield of 11%. The tax rate is 30%.

1. Should the company lease the equipment rather than buying it?

2. What will be the value of the lease if it is cancelled in the midway?