The Wildcat Oil Company Is Trying to Decide Whether to Lease

question 21

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 $1.2 million in annual pretax cost savings.The system costs $6.7 million and will be depreciated straight-line to zero over 4 years.Wildcat's tax rate is 35 percent,and the firm can borrow at 11 percent.Lambert Leasing Company has offered to lease the drilling equipment to Wildcat for payments of $1,700,000 per year.Lambert's policy is to require its lessees to make payments at the start of the year.Lambert requires Wildcat to pay a $270,000 security deposit at the inception of the lease.What is the NAL of leasing the equipment?

• A)$541,287
• B)$658,844
• C)$660,318
• D)$661,828
• E)$664,719

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Definitions:

Financial Statements

Documents that provide an overview of a company's financial condition, including the balance sheet, income statement, and cash flow statement.

Translating

The process of converting financial statements from one currency into another currency to provide comparability.

Subsidiary

A company that is completely or partly owned and partly or entirely controlled by another company.

Property, Plant & Equipment

This refers to tangible assets that are expected to be used in the production of goods or services and are not intended for sale in the ordinary course of business.