Wildcat Oil Company Case Study Help Analysis With Solution

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Use the following information to work Problems. 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 $700,000 in annual pretax cost savings. The system costs $6 million and will be depreciated straight-line to zero over five years. Wildcat’s tax rate is 34 percent, and the firm can borrow at 9 percent. Lambert Leasing Company has offered to lease the drilling equipment to Wildcat for payments of $1,400,000 per year. Lambert’s policy is to require its lessees to make payments at the start of the year.
1. Lease or Buy What is the NAL for Wildcat? What is the maximum lease payment that would be acceptable to the company?
 

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2. Leasing and Salvage Value Suppose it is estimated that the equipment will have an aftertax residual value of $500,000 at the end of the lease. What is the maximum lease payment acceptable to Wildcat now?
 
3. Deposits in Leasing Many lessors require a security deposit in the form of a cash payment or other pledged collateral. Suppose Lambert requires Wildcat to pay a $200,000 security deposit at the inception of the lease. If the lease payment is still $1,400,000, is it advantageous for Wildcat to lease the equipment now?
 

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