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
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 acquisition is the system has a positive NPV.
The system costs $6 million and qualifies for a 25% CCA rate.The equipment will have a $650,000 salvage value in 5 years.Wildcat's tax rate is 35%, and the firm can borrow at 8.5%.
Southdown Leasing Company has offered to lease the drilling equipment to Wildcat for $1,350,000 per year payable at the beginning of the year.
1.What is the NAL for Wildcat?
2.What is the maximum lease payment that would be acceptable to Wildcat?
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