Reference no: EM132468065
Question 1: 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 decided that it must use the system to stay competitive; it will provide $1.8 million in annual pretax cost savings. The system costs $9.3 million and will be depreciated straight-line to zero over its five-year life, after which it will be worthless. Wildcat's tax rate is 25 percent and the firm can borrow at 6 percent. Lambert Leasing Company has offered to lease the drilling equipment to Wildcat for payments of $2,086,667 per year. Lambert's policy is to require its lessees to make payments at the start of the year.
What is the NAL for Wildcat? (Do not round intermediate calculations and enter your answer in dollars, not millions of dollars, rounded to 2 decimal places, e.g., 1,234,567.89.)
What is the maximum lease payment that would be acceptable to Wildcat? (Do not round intermediate calculations and enter your answer in dollars, not millions of dollars, rounded to 2 decimal places, e.g., 1,234,567.89.)
Question 2: You work for a nuclear research laboratory that is contemplating leasing a diagnostic scanner (leasing is a common practice with expensive, high-tech equipment). The scanner costs $4,700,000 and would be depreciated straight-line to zero over three years. Because of radiation contamination, it will actually be completely valueless in three years. You can lease it for $1,750,000 per year for three years.
Assume that your company does not contemplate paying taxes for the next several years. You can borrow at 8 percent before taxes. What is the NAL of the lease? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)
Question 3: Witten Entertainment is considering buying a machine that costs $546,000. The machine will be depreciated over five years by the straight-line method and will be worthless at that time. The company can lease the machine with year-end payments of $141,000. The company can issue bonds at an interest rate of 6 percent. The corporate tax rate is 21 percent.
What is the NAL of the lease? (A negative answer should be indicated by a minus sign. Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)
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