Suppose that National Waferonics has before it a proposal for a four-year financial lease.

The firm constructs a table like Table 25.2 . The bottom line of its table shows the lease cash flows:

Year 0 Year 1 Year 2 Year 3 Lease cash flow 62,000 26,800 22,200 17,600 Visit us at www.mhhe.com/bma Chapter 25 Leasing 643 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 35%

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?

The following questions all apply to financial leases. To answer Problems 13 to 17 you may find it helpful to use the “live” Excel spreadsheets at www.mhhe.com/bma.

AppendixLO1