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 $3.9 million in annual pretax cost savings. The system costs $9 million and will be depreciated straight-line to zero over its five-year life, after which it will be worthless. Wildcat’s tax rate is 24 percent and the firm can borrow at 7 percent. Lambert Leasing Company has offered to lease the drilling equipment to Wildcat for payments of $1,940,000 per year. Lambert’s policy is to require its lessees to make payments at the start of the year. Suppose Lambert requires Wildcat to pay a $920,000 security deposit at the inception of the lease.

   

Calculate the NAL with the security deposit.

Answer 1

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