Question 13-The Wildcat Oil Company is trying to decide whether it will purchase or lease a computer assisted drilling system for its oil exploration operations. The management of the company has come to the conclusion that to remain competitive the company must use the system; this will provide the company with annual pre-tax savings of $300,000. The cost of the system is $2.75 million and will be fully amortized on a straight-line basis over 5 years. The company can borrow at 9%. The Southtown Leasing Company has offered to lease the equipment to Wildcat for an annual payment of $620,000. As a policy Southtown asks its tenants to make rental payments upfront. a) What is the ANL for Wildcat? What is the maximum rental amount that should accept the company? b) Assuming the equipment is estimated to have an after-tax residual value of $250,000 at the end of the lease period, what is the maximum lease amount that Wildcat should be willing to pay? c) Many landlords ask tenants for a security deposit in the form of cash payment or to put up property as collateral. Suppose Southtown forces Wildcat to pay a $100,000 security deposit at the start of the lease. If the lease payments are still $620,000 per year, is it beneficial for Wildcat to lease the equipment?
Question 13-The Wildcat Oil Company is trying to decide whether it will purchase or lease a computer assisted drilling system for its oil exploration operations. The management of the company has come to the conclusion that to remain competitive the company must use the system; this will provide the company with annual pre-tax savings of $300,000. The cost of the system is $2.75 million and will be fully amortized on a straight-line basis over 5 years. The company can borrow at 9%. The Southtown Leasing Company has offered to lease the equipment to Wildcat for an annual payment of $620,000. As a policy Southtown asks its tenants to make rental payments upfront. a) What is the ANL for Wildcat? What is the maximum rental amount that should accept the company? b) Assuming the equipment is estimated to have an after-tax residual value of $250,000 at the end of the lease period, what is the maximum lease amount that Wildcat should be willing to pay? c) Many landlords ask tenants for a security deposit in the form of cash payment or to put up property as collateral. Suppose Southtown forces Wildcat to pay a $100,000 security deposit at the start of the lease. If the lease payments are still $620,000 per year, is it beneficial for Wildcat to lease the equipment?
Intermediate Financial Management (MindTap Course List)
13th Edition
ISBN:9781337395083
Author:Eugene F. Brigham, Phillip R. Daves
Publisher:Eugene F. Brigham, Phillip R. Daves
Chapter12: Capital Budgeting: Decision Criteria
Section: Chapter Questions
Problem 14P
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Transcribed Image Text:Question 13 - The Wildcat Oil Company is trying to decide whether it will purchase or lease a computer
assisted drilling system for its oil exploration operations. The management of the company has come to the
conclusion that to remain competitive the company must use the system; this will provide the company with
annual pre-tax savings of $300,000. The cost of the system is $2.75 million and will be fully amortized on a
straight-line basis over 5 years. The company can borrow at 9%. The Southtown Leasing Company has
offered to lease the equipment to Wildcat for an annual payment of $620,000. As a policy Southtown asks
its tenants to make rental payments upfront.
a) What is the ANL for Wildcat? What is the maximum rental amount that
should accept the company?
b) Assuming the equipment is estimated to have an after-tax residual value of $250,000 at the end of
the lease period, what is the maximum lease amount that Wildcat should be willing to pay? c) Many
landlords ask tenants for a security deposit in the form of cash payment or to put up property as
collateral. Suppose Southtown forces Wildcat to pay a $100,000 security deposit at the start of the
lease. If the lease payments are still $620,000 per year, is it beneficial for Wildcat to lease the
equipment?
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