What is the maximum pre-tax lease payment

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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 determined that acquisition of the system has a positive NPV. The system costs $9.9 million and qualifies for a 30% CCA rate. The equipment will have a $980,000 salvage value in 5 years. Wildcat's tax rate is 35%, and the firm can borrow at 9.5%. Southtown Leasing Company has offered to lease the drilling equipment to Wildcat for payments of $2.20 million per year. Southtown's 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?

Reference no: EM133430313

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