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The Wildcat OIl Company is trying to decide whether to lease or buy...

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Accounting

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 $3.5 million in annual pretax cost
savings. The system costs $8.5 million and will be depreclated straight-line to zero over
five years. Wildcat's tax rate is 25 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
$800,000 at the end of the lease. What is the maximum lease payment acceptable to
Wildcat? (Do not round Intermedlate calculations and enter your answer In dollars, not
millions of dollars, rounded to 2 decimal places, e.g.,1,234,567.89.)
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