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 $2.8 million in annual pretax cost savings. The system costs $7.5 million and will be depreciated straight-line to zero over five years. Wildcat's tax rate is 22 percent, and the firm can borrow at 6 percent. Lambert Leasing Company has offered to lease the drilling equipment to Wildcat for payments of $1.67 million 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 $375,000 security deposit at the inception of the lease.

Calculate the NAL with the security deposit

Answer 1