10. Valuing financial leases (S26.4) Suppose that National Waferonics has before it a proposal for a four-year financial lease. The firm constructs a table like Table 26.2. 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 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?