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What is the maximum pre-tax lease payment

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Problem - 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 $9.6 million and qualities for a 27% CCA rate. The equipment will have a $977,000 salvage value in 5 years. Wildcat's tax rate is 38%, and the ?rm can borrow at 9.2%. Southtown Leasing Company has offered to lease the drilling equipment to Wildcat for payments of $2.17 million per year. Southtown's policy is to require its lessees to make payments at the start of the year.

Required -

1. What is the NAL for Wildcat?

2. What is the maximum pre-tax lease payment that would be acceptable to the company?

Reference no: EM132764752

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