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 $3.2 million in annual pretax cost savings. The system costs $9.1 million and will be depreciated straight-line to zero over five years. Wildcat's tax rate is 23 percent, and the firm can borrow at 7 percent. Lambert Leasing Company is willing to lease the equipment to Wildcat. 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 $950,000 at the end of the lease. What is the maximum lease payment acceptable to Wildcat? (Do not round intermediate calculations and enter yuor answer in dollars, not millions, rounded to 2 decimal places, e.g., 1,234,567.89.)

FINANCIAL ACCOUNTING
10th Edition
ISBN:9781259964947
Author:Libby
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Chapter1: Financial Statements And Business Decisions
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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 decided that it
must use the system to stay competitive; it will provide $3.2 million in annual pretax cost
savings. The system costs $9.1 million and will be depreciated straight-line to zero over
five years. Wildcat's tax rate is 23 percent, and the firm can borrow at 7 percent. Lambert
Leasing Company is willing to lease the equipment to Wildcat. 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 $950,000 at the end of the lease.
What is the maximum lease payment acceptable to Wildcat? (Do not round intermediate
calculations and enter yuor answer in dollars, not millions, rounded to 2 decimal
places, e.g., 1,234,567.89.)
Answer is complete but not entirely correct.
Maximum lease
S
1,892,031.90
раyment
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 decided that it must use the system to stay competitive; it will provide $3.2 million in annual pretax cost savings. The system costs $9.1 million and will be depreciated straight-line to zero over five years. Wildcat's tax rate is 23 percent, and the firm can borrow at 7 percent. Lambert Leasing Company is willing to lease the equipment to Wildcat. 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 $950,000 at the end of the lease. What is the maximum lease payment acceptable to Wildcat? (Do not round intermediate calculations and enter yuor answer in dollars, not millions, rounded to 2 decimal places, e.g., 1,234,567.89.) Answer is complete but not entirely correct. Maximum lease S 1,892,031.90 раyment
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