Question: Many lessors require a security deposit in the form of

Many lessors require a security deposit in the form of a cash payment or other pledged collateral. Suppose Lambert requires Wildcat to pay a $500,000 security deposit at the inception of the lease. If the lease payment is still $1,650,000, is it advantageous for Wildcat to lease the equipment now?
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 $2.6 million in annual pretax cost savings. The system costs $8.4 million and will be depreciated straight-line to zero over five years. Wildcat’s tax rate is 34 percent, and the firm can borrow at 9 percent. Lambert Leasing Company has offered to lease the drilling equipment to Wildcat for payments of $1,950,000 per year. Lambert’s policy is to require its lessees to make payments at the start of the year.

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  • CreatedAugust 28, 2014
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