Reference no: EM132494758

The Wildcat Oil Company is trying to decide whether to lease or buy a new computer-assisted drilling system for it oil exploration business. Management has already determined that the acquisition of the system has a positive NPV. The system costs $9.4million and qualifies for a 25 percent CCA rate. The equipment will have a $975,000 salvage value in five years. Wildcat's tax rate is 36 percent, and the firm can borrow at 9%. Southtown Leasing Company has offered to lease the drilling equipment to Wildcat for payments of $2.15million per year. Southtown's policy is to require its lesses to make payments at the start of the year.

a) What is the NAL for Wildcat? What is the maximum lease payment that would be acceptable to the company?

b) Suppose its estimated that the equipment will have no salvage value at the end of the lease. What is the maximum lease payment acceptable to Wildcat now?

c) Many lessors require a security deposit in the form of a cash payment or other pledged collateral. Suppose Southtown requires Wildcat to pay a $800,000 security deposit at the inception of the lease. If the lease payment is still $2,150,000 a year, is it advantageous for Wildcat to lease the equipment now?