The Glade Global company is trying to decide whether to lease or buy a new computer assisted drilling machine for its oil exploration business. Management has already determined that acquisition of the system has a positive NPV. The new system cots $9.4 million and qualifies for a 25% CCA rate. The equipment will have a $975,000 salvage value in 5 years. Glades tax rate is 36% and the firm can borrow at 9%. Southtown leasing company has offered to lease the drilling equipment to Glade for payments of $2.15 million per year. Southtowns policy is to require its lessees to make payment at the start of the year.

Many lessors require a security deposit in the form of a cash payment or other pledged collateral. Suppose Southtown requires Glade to pay $800,000 security deposit at the inception of the lease and the lease is still $2.15 million per year, is it advantageous for Glade to lease the equipment?

a) Yes, they should lease

b) No, they should buy the equipment

c) Cant be determined.

d) Any option works fine.

B is correct