The Wildcat Oil Company Is Trying to Decide Whether to Lease

question 32

Multiple Choice

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 $850,000 in annual pretax cost savings.The system costs $8 million and will be depreciated straight-line to zero over 5 years.Wildcat's tax rate is 34 percent,and the firm can borrow at 8 percent.Lambert Leasing Company has offered to lease the drilling equipment to Wildcat for payments of $2,040,000 per year.Lambert's policy is to require its lessees to make payments at the start of the year.What is the maximum lease payment that would be acceptable to the company?

• A)$1,893,231
• B)$1,896,996
• C)$1,904,506
• D)$1,906,318
• E)$1,911,472

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