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What is the net advantage to leasing for wildcat

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Question - The ABC 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 $700,000 in annual pre tax cost savings. The system costs $6 million and will be depreciated straight-line to zero over five years. ABC's tax rate is 34 per cent, and the firm can borrow at 9 per cent. Lambert Leasing Company has offered to lease the drilling equipment to ABC for payments of $1,400,000 per year. Lambert's policy is to require its lessees to make payments at the start of the year.

What is the net advantage to leasing for Wildcat? What is the maximum lease payment that would be acceptable to the company?

Reference no: EM133004183

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