The Wildcat Oil Company Is Trying to Decide Whether to Lease

question 33

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 $550,000 in annual pretax cost savings.The system costs $3 million and will be depreciated straight-line to zero over 4 years.It is estimated that the equipment will have an aftertax residual value of $500,000 at then end of the lease.Wildcat's tax rate is 31 percent,and the firm can borrow at 10 percent.Lambert Leasing Company has offered to lease the drilling equipment to Wildcat for payments of $940,000 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)$729,932
• B)$734,515
• C)$748,200
• D)$751,646
• E)$762,937

---

Definitions:

FOB Shipping Point

A term used in shipping agreements indicating that the buyer is responsible for paying shipping costs and for the goods at the point of departure from the seller's shipping dock.

Inventory Turnover

An indicator of the number of times a business's inventory turns over and is replenished during a certain period, demonstrating how efficiently inventory is managed.

Specific Identification Method

An inventory valuation method that tracks the actual cost of each specific item of inventory to determine cost of goods sold and ending inventory.

Average-Cost Method

An inventory costing method that calculates the cost of goods sold and ending inventory value based on the weighted-average cost of all items.