Help please, I am stuck!!! The Wildcat Oil Company is trying to decide whether t

Question

Help please, I am stuck!!!

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 $2.7 million in annual pretax cost savings. The system costs $9.4 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 $2.15 million per year. Lambert's policy is to require its lessees to make payments at the start of the year. What is the NAL for Wildcat? What is the maximum lease payment?

Please state what is the NAL and maximum lease payment amount?

Explanation / Answer

Annual pre tax cost saving = 2.7 million

Tax@34%.

After tax cost saving = 1.7282 millions.

Year Cash Flow Discount @ 9% Discounted cash flows 0 -9.4 1 -9.4 1 2.3664 0.917431193 2.171009174 2 2.3664 0.841679993 1.991751536 3 2.3664 0.77218348 1.827294987 4 2.3664 0.708425211 1.676417419 5 2.3664 0.649931386 1.537997633 NPV -0.19552925 Year Cash Flow Discount @ 9% Discounted cash flows 0 -9.4 1 -9.4 0 2.15 1 2.15 1 2.15 0.917431193 1.972477064 2 2.15 0.841679993 1.809611986 3 2.15 0.77218348 1.660194482 4 2.15 0.708425211 1.523114204 NPV -0.284602264 Year Cash Flow Discount @ 9% Discounted cash flows 0 -9.4 1 -9.4 0 2.215 1 2.215 1 2.215 0.917431193 2.032110092 2 2.215 0.841679993 1.864321185 3 2.215 0.77218348 1.710386408 4 2.215 0.708425211 1.569161843 NPV -0.009020472

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