Wildcat Oil Company is considering whether to purchase or lease a computer-aided drilling system for its oil exploration operations. The company's management has concluded that to remain competitive the company must use the system, which will provide the company with annual pre-tax savings of $300,000. The cost of the system is $2.75 million and will be fully amortized on a straight-line basis over 5 years. The company can borrow at 9%. Southtown Leasing Company has offered to lease the equipment to Wildcat for an annual payment of $620,000. As a matter of policy, Southtown requires its lessees to make lease payments up front. The company's tax rate is 35%.

a) What is the ANL for Wildcat? What is the maximum rental amount the company the company should accept?

b) Assuming the equipment is estimated to have a residual after-tax value of of $250,000 at the end of the lease period, what is the maximum lease amount should Wildcat be willing to pay?

c) Many landlords require tenants to pay a security deposit in the form of cash or collateral. Let's assume that Southtown requires Wildcat to pay a $100,000 security deposit at the beginning of the lease. If the lease payments are always $620,000 per year, is it advantageous for Wildcat to lease the equipment? Justify your answer.