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64. 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 $850,000 in annual pretax cost savings. The system costs $8 million and will be depreciated straight-line to zero over 5 years. 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 $2,040,000 per year. Lambert's policy is to require its lessees to make payments at the start of the year. What is the maximum lease payment that would be acceptable to the company? A. $1,893,231 B. $1,896,996 C. $1,904,506 D. $1,906,318 E. $1,911,472 The pretax cost savings are not relevant to the lease versus buy decision since the firm will definitely use the equipment and realize the savings regardless of the financing choice made. Depreciation tax shield lost = ($8,000,000/5) (0.34) = $544,000 Aftertax debt cost = 0.08 (1 - 0.34) = 0.0528 NAL =0 = $8,000,000 - X (1.0528) (PVIFAS_ZB%’ Bl $544,000(PVIFA5_28%' 5) X =$1,252,017.09 Pretax lease payment = $1,252,017.09/(1 - 0.34) = $1,896,996
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Related Questions
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 $4.4 million in annual pretax cost
savings. The system costs $9.4 million and will be depreciated straight-line to zero over
five years. Wildcat's tax rate is 24 percent and the firm can borrow at 7 percent.
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
$980,000 at the end of the lease. What is the maximum lease payment acceptable to
Wildcat? (Do not round intermediate calculations and enter your answer in dollars, not
millions of dollars, rounded to 2 decimal places, e.g., 1,234,567.89.)
Lease payment
arrow_forward
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 $3.9 million in annual pretax cost savings. The system costs $8.9 million and will be depreciated straight-line to zero over five years. Wildcat’s tax rate is 24 percent and the firm can borrow at 6 percent. 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 $880,000 at the end of the lease. What is the maximum lease payment acceptable to Wildcat? (Do not round intermediate calculations and enter your answer in dollars, not millions of dollars, rounded to 2 decimal places, e.g., 1,234,567.89.)
arrow_forward
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 $2.7 million in annual pretax cost savings. The system costs $8.6 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 after tax residual value of $825,000 at the end of the lease. What is the maximum lease payment acceptable to Wildcat? (Do not round intermediate calculations and enter your answer in dollars, not millions, rounded to 2 decimal places, e.g., 1,234,567.89.).
arrow_forward
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 $2.7 million in annual pretax cost
savings. The system costs $7.5 million and will be depreciated straight-line to zero over
5 years. Wildcat's tax rate is 24 percent, and the firm can borrow at 6 percent. Lambert
Leasing Company has offered to lease the drilling equipment to Wildcat for payments of
$1.71 million per year. Lambert's policy is to require its lessees to make payments at the
start of the year.
a. What is the NAL for Wildcat? (A negative answer should be indicated by a minus
sign. Do not round intermediate calculations and enter your answer in dollars, not
millions of dollars, rounded to 2 decimal places, e.g., 1,234,567.89.)
b. What is the maximum lease payment that would be acceptable to the company? (Do
not round intermediate calculations and…
arrow_forward
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
arrow_forward
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 $1.3 million in annual pretax cost
savings. The system costs $6.3 million and will be depreciated straight-line to zero over
four years. Wildcat's tax rate is 31 percent, and the firm can borrow at 8 percent. Lambert
Leasing Company has offered to lease the drilling equipment to Wildcat for payments of
$1,700,000 million per year. Lambert's policy is to require its lessees to make payments
at the start of the year.
Many lessors require a security deposit in the form of a cash payment or other pledged
collateral. Suppose Lambert requires Wildcat to pay a $270,000 security deposit at the
Inception of the lease. What is the NAL with the security deposit?
Multiple Choice
$210,719.39
$200,685.13
O $190,650.87
O $-17,098.20
O $427,537.55
arrow_forward
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 $3.4 million in annual pretax cost
savings. The system costs $7.5 million and will be depreciated straight-line to zero over
five years. Wildcat's tax rate is 24 percent, and the firm can borrow at 8 percent. Lambert
Leasing Company has offered to lease the drilling equipment to Wildcat for payments of
$1.71 million per year. Lambert's policy is to require its lessees to make payments at the
start of the year. Suppose Lambert requires Wildcat to pay a $375,000 security deposit
at the inception of the lease. Calculate the NAL with the security deposit (A negative
answer should be indicated by a minus sign. Do not round intermediate calculations
and enter your answer in dollars, not millions, rounded to 2 decimal places, e.g.,
1,234,567.89.)
NAL
arrow_forward
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 $3.1 million in annual pretax cost
savings. The system costs $9.8 million and will be depreciated straight-line to zero over
its five-year life, after which it will be worthless. Wildcat's tax rate is 23 percent and the
firm can borrow at 7 percent. Lambert Leasing Company has offered to lease the drilling
equipment to Wildcat for payments of $2,110,000 per year. Lambert's policy is to require
its lessees to make payments at the start of the year.
a. What is the NAL for Wildcat? (Do not round intermediate calculations and enter your
answer in dollars, not millions of dollars, rounded to 2 decimal places, e.g.,
1,234,567.89.)
b. What is the maximum lease payment that would be acceptable to Wildcat? (Do not
round intermediate calculations and enter your answer…
arrow_forward
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 $2.1 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, after which it will be worthless. Wildcat's tax rate is 23 percent and the
firm can borrow at 9 percent. Lambert Leasing Company has offered to lease the drilling
equipment to Wildcat for payments of $2,180,000 per year. Lambert's policy is to require
its lessees to make payments at the start of the year.
a. What is the NAL for Wildcat? (Do not round intermediate calculations and enter your
answer in dollars, not millions of dollars, rounded to 2 decimal places, e.g.,
1,234,567.89.)
b. What is the maximum lease payment that would be acceptable to Wildcat? (Do not
round intermediate calculations and enter your answer…
arrow_forward
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 $2.7 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, after which it will be worthless. Wildcat's tax rate is 23 percent and the
firm can borrow at 9 percent. Lambert Leasing Company has offered to lease the drilling
equipment to Wildcat for payments of $2.05 million per year. Lambert's policy is to
require its lessees to make payments at the start of the year.
What is the NAL for Wildcat? (Do not round intermediate calculations and enter your
answer in dollars, not millions of dollars, rounded to 2 decimal places, e.g.,
1,234,567.89.)
What is the maximum lease payment that would be acceptable to Wildcat? (Do not
round intermediate calculations and enter your answer in…
arrow_forward
The New Energy Company is trying to decide whether to lease or buy a new computer-
assisted control system for its business. Management has estimated that the new system
will provide $2.9 million in annual pre-tax cost savings. The system costs $6 million and will
be depreciated straight-line to zero over its five-year life, after which it will be worthless. The
New Energy Company's tax rate is 22 percent and the firm can borrow at 9 percent. Golden
Leasing Company has offered to lease the equipment to the New Energy Company for
payments of $1,780,000 per year. Golden Leasing Company's policy is to require its lessees
to make payments at the start of the year. Suppose Golden Leasing Company requires the
New Energy Company to pay a $820,000 security deposit at the inception of the lease.
a) Calculate the depreciation tax shield
b) Calculate the aftertax lease payment
c) Calculate the aftertax cost of debt
d)
Calculate the NAL with the security deposit. (Do not round intermediate…
arrow_forward
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.
arrow_forward
Use the following information to work Problems 9-11. 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 $2.7 million in annual pretax cost savings. The system costs $9.4
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 9 percent. Lambert Leasing Company has offered to lease the drilling equipment to Wildcat for payments
of $2.05 million per year. Lambert's policy is to require its lessees to make payments at the start of the year.
Lease or Buy What is the NAL for Wildcat? What is the maximum lease payment that would be acceptable to
the company?
arrow_forward
Cori's Meats is looking at a new sausage system with an installed cost of $440,000. The system qualifies for 100 percent bonus depreciation, but at the end of the project in 5 years the sausage system can be scrapped for $62,000. The sausage system will save the firm $215,000 per year in pretax operating costs, and the system requires an initial investment in net working capital of $21,000. If the tax rate is 23 percent and the discount rate is 10 percent, what is the NPV of this project? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)
arrow_forward
The Papillon Corporation is considering launching a new project, and it would like to do
the math to figure out if it is worth it.
The Papillon Corporation has no loans, and currently its cost of equity is 10.9 %.
The project would require an immediate investment of $11.46 million to buy production
equipment. The equipment will depreciate according to the straight-line method, and
its economic life is 6 years. The Papillon Corporation expects that this 6-year-
long project would bring "revenues minus costs of goods sold" in the amount of $3.23
million each year. (Use the company's cost of equity to discount their after-tax values.)
You also know that the T-Bill, or the risk-free, rate is 2.8 % per year. (Use this rate to
discount the risk-free cash flows from this project, such as the annual "depreciation
tax shields" (HINT: see Ch.6 PowerPoint!).)
The Papillon Corporation faces a 22 % income tax rate.
First, find the project's estimated unlevered cash flows, and then calculate the…
arrow_forward
LNZ Corp. is thinking about leasing equipment to make tinted lenses. This equipment would cost $600, 000 if purchased. The CCA rate on the equipment is 30% and the
salvage value after its five-year life will be $122,451. There are no capital gains or losses to worry about. The firm's corporate tax rate is 40% and its pre-tax cost of debt is
10%. WeLease Corp. has offered to lease the system to LNZ for payments of $102,000 per year for five years. These lease payments would be made at the START of the
year. Now suppose that you are told that the lens - tinting equipment would bring LNZ after-tax cost savings of $5,000 per year for five years. If all other details are as given
in the original question data, how would these cost savings affect the NAL for LNZ? A) The NAL would decrease by $25,000. B) The NAL would decrease by $21,062. C)
The NAL would increase by $25,000. D) The NAL would increase by $21,062. E) The NAL would not be affected.
arrow_forward
llana Industries, Inc., needs a new lathe. It can buy a new high-speed lathe for $0.97 million. The lathe will cost $31,300 to run, will save
the firm $127,700 in labour costs, and will be useful for 10 years. Suppose that for tax purposes, the lathe will be in an asset class with a
CCA rate of 25%. llana has many other assets in this asset class. The lathe is expected to have a 10-year life with a salvage value of
$91,000. The actual market value of the lathe at that time will also be $91,000. The discount rate is 15% and the corporate tax rate is
35%.
What is the NPV of buying the new lathe? (Round your answer to the nearest cent.)
NPV $
arrow_forward
akeland Company is considering the purchase of equipment for $175,000. The equipment will expand the Company's production and increase revenue by $40,000 per year. Annual cash operating expenses will increase by $12,000. The equipment's useful life is 10 years with no salvage value. Lakeland uses straight-line depreciation. The income tax rate is 25%. What is the average rate of return on the investment?
Do not use negative signs with your answers.
Increase in revenue
Answer
Increase in expenses
Answer
Pretax income from investment
Answer
Income tax expense
Answer
Net income from investment
Answer
Round answer to the nearest whole percentage, if applicable.
Average rate of return on investment
Answer
%
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28) The Wolf's Den Outdoor Gear is considering replacing the equipment it uses to produce tents. The
equipment would cost $1.4 million and lower manufacturing costs by an estimated $215,000 a year. The
equipment will be depreciated over 8 years using straight-line depreciation to a book value of zero. The
required rate of return is 15 percent and the tax rate is 21 percent. The equipment will be used for 8 years
and thereafter will be worthless. What is the annual operating cash flow from this proposed project?
arrow_forward
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Related Questions
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