Question

The Wildcat Oil Company is trying to decide whether to lease or buy a new computer-assisted drilling system for its oil exploration business. Management has already determined that the acquisition of the system has a positive NPV. The system costs $10.0 million and qualifies for a 31% CCA rate. The equipment will have a $981,000 salvage value in 5 years. Wildcat’s tax rate is 36%, and the firm can borrow at 9.6%. Southtown Leasing Company has offered to lease the drilling equipment to Wildcat for payments of $2.21 million per year. Southtown’s policy is to require its lessees to make payments at the start of the year.

What is the NAL for Wildcat? (Enter the answer in dollars and not in millions of dollars. Do not round intermediate calculations. Round the final answer to 2 decimal places. Omit $ sign in your response.)

NAL           $ =

What is the maximum pre-tax lease payment that would be acceptable to the company? (Enter the answer in dollars and not in millions of dollars. Do not round intermediate calculations. Round the final answer to 2 decimal places. Omit $ sign in your response.)

Maximum lease payment =

Answer 1

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