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 $3.3 million in annual pretax cost savings. The system costs $7.4 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 7 percent. Lambert Leasing Company has offered to lease the drilling equipment to Wildcat for payments of $1.66 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 $350,000 security deposit at the inception of the lease.

1. Calculate the NAL with the security deposit. (A negative answer should be indicated by a minus sign. Do not round intermediate calculations and enter your answer in dollars, not millions, rounded to 2 decimal places, e.g., 1,234,567.89.)

2. Should Wildcat lease or buy the system? (Choose one of the choice.)

Choice A: The firm should buy the equipment.

Choice B: The firm should lease the equipment.

Answer 1