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Question: The Wildcat Oil Company is trying to

The Wildcat Oil Company is trying to decide whether to lease or buy a new computerassisted drilling system for its oil exploration business. Management has decided that it must use the system to stay competitive; it will provide $2.8 million in annual pretax cost savings. The system costs $8.78 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 7 percent. Lambert Leasing Company has offered to lease the drilling equipment to Wildcat for payments of $1.95 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 $600,000 security deposit at the inception of the lease. If the lease payment is still $1.95 million, is it advantageous for Wildcat to lease the equipment now?


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