Valuing financial leases* Suppose that National Waferonics has before it a proposal for a four-year financial lease of a Waferooney machine. The firm constructs a table like Table 25.2. The bottom line of its table shows the lease cash flows:
These flows reflect the cost of the machine, depreciation tax shields, and the after-tax lease payments. Ignore salvage value. Assume the firm could borrow at 10% and faces a 21% marginal tax rate.
a. What is the value of the equivalent loan?
b. What is the value of the lease?
c. Suppose the machine’s NPV under normal financing is –$5,000. Should National Waferonics invest? Should it sign the lease?