WLM company is trying to decide whether to lease or buy a new computer-assisted drilling system for
Question:
WLM 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. This system will provide $3 million in annual pre-tax cost savings. The system costs $9 million and will be depreciated straight-line to zero over five years. The company tax rate is 30%. The company can borrow at 10%. LLC Company has offered to lease the computer-assisted drilling system to WLM for payments of $1.9 million per year. LLC policy is to require its lessees to make payments at the beginning of the year.
(a)Calculate the net advantage to lease (NAL) for WLM. (4 Marks)
(b)Calculate the maximum lease payment that would be acceptable to WLM.(6 marks)
(c)Calculate the maximum lease payment that would be acceptable to WLM if the after-tax residual value of drilling system is $700,000 at the end of the lease period.(6 marks)