View the step-by-step solution to:

Suppose Amazon is considering the purchase of computer servers and network infrastructure to expand its very successful business offering cloud-based...

Suppose Amazon is considering the purchase of computer servers and network infrastructure to expand its very successful business offering​ cloud-based computing. In​ total, it will purchase $ 48.6


$48.6 million in new equipment. This equipment will qualify for accelerated​ depreciation: 20 %


20% can be expensed​ immediately, followed by 32 %


32%​, 19.2 %


19.2%​, 11.52 %


11.52%​, 11.52 %


11.52%​, and 5.76 %


5.76% over the next five years.​ However, because of the​ firm's substantial loss carryforwards and other​ credits, Amazon estimates its marginal tax rate to be 10 %


10% over the next five​ years, so it will get very little tax benefit from the depreciation expenses.​ Thus, Amazon considers leasing the equipment instead. Suppose Amazon and the lessor face the same 8.4 %


8.4% borrowing​rate, but the lessor has a 35 %


35% tax rate. For the purpose of this​ question, assume the equipment is worthless after five​ years, the lease term is five​ years, and 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 Amazon with this lease​ rate?

c. What is the source of the gain in this​ transaction?

a. What is the lease rate for which the lessor will break​ even?

Calculate the FCF below​ ($ million):  ​(Round to three decimal​ places.)

Year

 

0

Buy:

 

 

Capital Expenditures

$

(48.600)

Depreciation Tax Shield

$

3.402

Free Cash Flow (Buy)

$

(45.198)

​(Round to three decimal​ places.)

Recently Asked Questions

Why Join Course Hero?

Course Hero has all the homework and study help you need to succeed! We’ve got course-specific notes, study guides, and practice tests along with expert tutors.

-

Educational Resources
  • -

    Study Documents

    Find the best study resources around, tagged to your specific courses. Share your own to gain free Course Hero access.

    Browse Documents
  • -

    Question & Answers

    Get one-on-one homework help from our expert tutors—available online 24/7. Ask your own questions or browse existing Q&A threads. Satisfaction guaranteed!

    Ask a Question