Meeker Machine and Die Company has learned that a sophisticated piece of computer operated machinery is available to either buy or rent. The machinery will result in three employees being replaced, and quality of the output has been tested to be superior in every demonstration. There is no doubt that this machinery represents the latest in technology; however, new inventions and research make it difficult to estimate when the machinery will be made obsolete by new technology. The physical life expectancy of the machine is 10 years; however, the estimated economic life is between two and five years.
Meeker has a debt-to-equity ratio of 0.75. If the machine is purchased and the minimum down payment is made, the outstanding loan balance on the machine will cause the debt-to-equity ratio to increase to 1.1. The monthly payments if the machine is purchased are 20% lower than the lease payments if it is leased. The incremental borrowing rate for Meeker is 11%. The rate implicit in the lease is 12%. What factors should Meeker consider in deciding how to finance the acquisition of the machine?