The ABC Company is trying to decide whether to lease or buy a new computer-assisted drilling...

   

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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 $1.2 million in annual pretax cost savings. The system costs $6.7 million and will be depreciated straight-line to zero over 4 years. ABC's tax rate is 35 percent, and the firm can borrow at 11 percent. XYZ Leasing Company has offered to lease the drilling equipment to ABC for payments of $1,750,000 per year. XYZ's policy is to require its lessees to make payments at the start of the year. XYZ requires ABC to pay a $270,000 security deposit at the inception of the lease. a) What is the NAL of leasing the equipment? Should ABC lease? (15 marks) b) What happens to the NPV of leasing if the tax rate increases? (5 marks) 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 $1.2 million in annual pretax cost savings. The system costs $6.7 million and will be depreciated straight-line to zero over 4 years. ABC's tax rate is 35 percent, and the firm can borrow at 11 percent. XYZ Leasing Company has offered to lease the drilling equipment to ABC for payments of $1,750,000 per year. XYZ's policy is to require its lessees to make payments at the start of the year. XYZ requires ABC to pay a $270,000 security deposit at the inception of the lease. a) What is the NAL of leasing the equipment? Should ABC lease? (15 marks) b) What happens to the NPV of leasing if the tax rate increases? (5 marks)

Answer rating: 100% (QA)

Answer a Net Advantage to Leasing NAL NAL compares the present value of the aftertax cash ... View the full answer