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

Question:

Suppose that National Waferonics has before it a proposal for a four-year financial lease. The firm constructs a table like Table. 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 35% marginal tax rate.
a. What is the value of the equivalent loan?
b. What is the value of the lease?
c. Suppose the machineâ€™s NPV under normal financing is - $5,000. Should National Waferonics invest? Should it sign thelease?

Salvage Value
Salvage value is the estimated book value of an asset after depreciation is complete, based on what a company expects to receive in exchange for the asset at the end of its useful life. As such, an asset’s estimated salvage value is an important...