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
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 of the system has a positive NPV. The system costs $10.4 million and qualifies for a 35% CCA rate. The equipment will have a $985,000 salvage value in 5 years. Wildcats tax rate is 40%, and the firm can borrow at 10.0%. Southtown Leasing Company has offered to lease the drilling equipment to Wildcat for payments of $2.25 million per year. Southtowns policy is to require its lessees to make payments at the start of the year.
What is the NAL for Wildcat?
What is the maximum pre-tax lease payment that would be acceptable to the company?
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