1. Look at. How would the initial break even operating lease rate change if rapid technological change in limo manufacturing reduces the costs of new limos by 5% per year? ( Hint: We discussed technological change and equivalent annual costs.)
2. 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 |
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?