Solution-Is Pagani Oil better off with the purchase or

Is Pagani Oil better off with the purchase or finance lease

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Question - In March 2018 the board of Pagani Oil (PO) met to discuss a proposal to purchase or lease two oil drilling rigs at the cost of $#% million. There was general enthusiasm for the investment with the new drilling rigs expected to generate an annual cash flow of $6 million for 15 years. If purchased, the rigs would be depreciated on a straight-line basis over 15 years for tax purpose. The management team thinks the rigs will be worth $5 million after 15 years. If leased, the annual lease payment would be $4.5 million per year for 15 years. The company's tax rate is 30%. The weighted average cost of capital for the oil industry is 15%, but PO can borrow at 9%. The expected inflation rate is 5%. Compare the incremental cash flow of the lease and purchase options. Is Pagani Oil better off with the purchase or finance lease? Show detailed workings.

Reference no: EM132966966

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Is Pagani Oil better off with the purchase or finance lease

Reference no: EM132966966

Reference no: EM132966966

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