The Wildcat Oil Company is trying to decide whether to lease or buy a new computer assisted
Question:
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 $2.7 million in annual pretax cost savings. The system costs $9.4 million and will be depreciated straight-line to zero over five years. Wildcat’s tax rate is 23 percent and the firm can borrow at 9 percent. Lambert Leasing Company has offered to lease the drilling equipment to Wildcat for payments of $2.05 million per year. Lambert’s policy is to require its lessees to make payments at the start of the year.
Many lessors require a security deposit in the form of a cash payment or other pledged collateral. Suppose Lambert requires Wildcat to pay a $1.5 million security deposit at the inception of the lease. If the lease payment is still $2.05 million, is it advantageous for Wildcat to lease the equipment now?
Step by Step Answer:
Corporate Finance
ISBN: 978-1259918940
12th edition
Authors: Stephen Ross, Randolph Westerfield, Jeffrey Jaffe, Bradford Jordan