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The ZYX 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 $1.2 million in annual pretax cost savings. The system costs $6.7 million and will be depreciated straight-line to zero over 4 years. ZYX’s tax rate is 35 percent, and the firm can borrow at 11 percent. Lambert Leasing Company has offered to lease the drilling equipment to ZYX for payments of $1,700,000 per year. Lambert’s policy is to require its lessees to make payments at the start of the year. Lambert requires ZYX to pay a $270,000 security deposit at the inception of the lease. What is the NAL of leasing the equipment? (16 marks)

b. Explain the “leasing paradox” and also explain why leasing is or is not a “zero sum game”. (4 marks)

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