Question

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 $2.4 million in annual pretax cost savings. The system costs $9.4 million and will be depreciated straight-line to zero over its five-year life. 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 $2,140,000 per year. Lambert’s policy is to require its lessees to make payments at the start of the year.

  

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? (Enter your answer in dollars, not millions of dollars, e.g., 1,234,567. Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

  

Lease payment

$

Answer 1

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Home ert Page Layout Formulas Data Review V 義Cut ta copy." Format Painter Add-Ins Σ AutoSum , Fill В า 프. m. a-Δ. Ξミ 迣锂函Merge & Center. $, % , 弼皛Conditional Format. Cell. Insert Delete Format Paste Sort &Find & Formatting as Table Styles ClearFilter Select Clipboard Font Cells dting Alignment JU222 JP Ja JR JS JT JU JV JY JZ KA 206 207 208 209 210 211 212 213 214 215 216 217 218 219 220 ANS 221 MAXIMUM LEASE PAYMENT ACCEPTABLE TO WILDCAT WITH SALVAGE VALUE GIVEN (9400000/5)(0.34)- DEPRECIATION TAX SHIELD LOST SALVAGE VALUE AFTER TAX COST OF DEBT 639200 500000 5.28% 8%( 1-0.34)- NAL- COST OF EQUIPMENT-AFTER TAX LEASE PAYMENT X PVI FAD@ 5.28%, 5 YEARS - DEPRECIATION TAX SHIELD LOST X PVIFA@ 5.28%, 5 YEARS SALVAGE VALUE X PVIF @5.28%, 5 YEARS 9400000-LP"4.523008-(639200 X 4.296170)-(500000 x 0.773162) NAL- -LP#4.523008-6267307.14 1385650.24 NOTE PVIFAD @ 5.28%, 5 YEARS PVIFA @5.28%,5 YEARS PVIF@5.28%, 5 YEARS LP = 4.523008 4.296170 0.773162 MAXIMUM LEASE PAYMENT (PRE TAX)- 2099470.07 [1385650.24/(1-0.34)] 223 224 4marginal tax PB ROPI APV ROSS eEVA MVA LEVERAGED BUY SWAP dstress BRIGHAN CAP GAIN Sheet1 Sheet2Sheet3 erences: AL125 05:04