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 $1.1 million in annual pretax cost savings. The system costs $6.8 million and will be depreciated straight-line to zero over four years. Wildcat's tax rate is 33 percent, and the firm can borrow at 11 percent. Lambert Leasing Company has offered to lease the drilling equipment to Wildcat for payments of $1,700,000 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 $210,000 security deposit at the inception of the lease. What is the NAL with the security deposit?

• $755,546.37

• $793,323.69

• $717,769.06

• $597,535.32

• $1,037,524.49

Answer 1