Suppse Netflix is considering the purchase of a computer servers and network infrastructure to facilitate its move into video on demand services. In total, it will purchase $48.1 million in new equipment. This equipment will qualify for accelerated depreciation: 20% can be expensed immediately, followed by 32%, 19.2%, 11.52%, 11.52%, and 5.76% over the next 5 years. However, because of the firms substantial loss carryforwards, Netflix estimates ita marginal tax rate to be 10% over the next 5 years, so it will get very little tac benefit from the depreciation expenses. Thus, Netflix considers leasing the equipment instead. Suppose Netflix and the lessor face the same 7.8% borrowing rate, but the lessor has a 35% tax rate. For tye purpose of this question, assume the equipment is worthless after 5 years, the lease qualifies as a true tax lease.
a. What is the lease rate for which the lessor will break even?
b. What is the gain to Netflix with the lease rate?
c. What is the source of the gain in the transaction?