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Suppose Netflix is considering the purchase of special software to facilitate its move into video-on-demand services. In total, the firm will...

Suppose Netflix is considering the purchase of special software to facilitate its move into​ video-on-demand services. In​ total, the firm will purchase​ $48 million in new software. This software will qualify for CCA deductions at a rate of​ 100%. However, because of the​ firm's substantial loss​ carryforwards, Netflix estimates its marginal tax rate to be​ 10% over the next five​ years, so it will get very little tax benefit from the CCA deductions. Thus Netflix considers leasing the software instead. Suppose Netflix and the lessor face the same​ 8% borrowing​ rate, but the lessor has a​ 40% tax rate. For the purpose of this​ question, assume the software 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 Netflix with this lease​ rate?

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

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