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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.
Automobiles are often leased, and several terms are unique to auto leases. Suppose you are considering leasing a car. The price you and the dealer agree on for the car is $49,500. This is the base capitalized cost. Other costs added to the capitalized cost price include the acquisition (bank) fee, insurance, or extended warranty. Assume these costs are $850. Capitalization cost reductions include any down payment, credit for trade-in, or dealer rebate. Assume you make a down payment of $5,000, and there is no trade-in or rebate. If you drive 10,000 miles per year, the lease-end residual value for this car will be $28,500 after three years. The lease or “money” factor, which is the interest rate on the loan, is the APR of the loan divided by 2,400.6 The lease factor the dealer quotes you is .00185. The monthly lease payment consists of three parts: a depreciation fee, a finance fee, and sales tax. The depreciation fee is the net capitalization cost minus the residual value, divided by the term of the lease. The net capitalization cost is the cost of the car minus any cost reductions plus any additional costs. The finance fee is the net capitalization cost plus the residual, times the money factor, and the monthly sales tax is the depreciation payment plus the finance fee, times the tax rate. What APR is the dealer quoting you? What is your monthly lease payment for a 36-month lease if the sales tax is 7 percent?


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