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 already determined that acquisition of the system has a positive NPV. The system costs $9.78 million and qualifies for a 25% CCA rate. The equipment will have a $994,000 salvage value in 5 years. Wildcat's tax rate is 36%, and the firm can borrow at 9.0%. Southtown Leasing Company has offered to lease the drilling equipment to Wildcat for payments of $2.53 million per year. Southtown's policy is to require its lessees to make payments at the start of the year.

EBK CONTEMPORARY FINANCIAL MANAGEMENT
14th Edition
ISBN:9781337514835
Author:MOYER
Publisher:MOYER
Chapter9: Capital Budgeting And Cash Flow Analysis
Section: Chapter Questions
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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 already determined that
acquisition of the system has a positive NPV. The
system costs $9.78 million and qualifies for a 25%
CCA rate. The equipment will have a $994,000
salvage value in 5 years. Wildcat's tax rate is 36%,
and the firm can borrow at 9.0%. Southtown
Leasing Company has offered to lease the drilling
equipment to Wildcat for payments of $2.53 million
per year. Southtown's policy is to require its lessees
to make payments at the start of the year.
Transcribed Image Text: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 already determined that acquisition of the system has a positive NPV. The system costs $9.78 million and qualifies for a 25% CCA rate. The equipment will have a $994,000 salvage value in 5 years. Wildcat's tax rate is 36%, and the firm can borrow at 9.0%. Southtown Leasing Company has offered to lease the drilling equipment to Wildcat for payments of $2.53 million per year. Southtown's policy is to require its lessees to make payments at the start of the year.
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