The ABC Oil Company is trying to decide whether to lease or buy a new computerassisted drilling system for its oil exploration business. Management has decided that it must use thee system to stay competitive; it will provide $$2\mathrm{.}7$ million in annual pretax cost savings. The system costs $$9\mathrm{.}4$ million and will be depreciated straight$-$line to zero over five years. ABC $\text{'}$s tax rate is $23$ percent and the firm can borrow at $9$ percent. Crawford Leasing Company has offered to lease the drilling equipment to ABC for payments of $$2\mathrm{.}05$ million per year. Crawford's policy is to require its lessees to make payments at the start of the year.

a$.$ What is the NAL for ABC $?(8$ marks$)$

b$.$ What is the maximum lease payment that would be acceptable to the company? $(8$ marks$)$

c$.$ Comment on the following remarks: $(4$ marks$)$

I. Leasing reduces risk and can reduce a firm's cost of capital.

II$.$ If the tax advantages of leasing were eliminated, leasing would disappear.