value of $650,000 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.)
value of $650,000 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.)
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
Related questions
Question
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 $1.9 million in
annual pretax cost savings. The system costs $7.7 million and will be depreciated
straight-line to zero over five years. Wildcat's tax rate is 21 percent, and the firm can
borrow at 6 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 $650,000 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.)
Maximum lease
payment
$
1,114,590.00
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