What is the gain to netflix with this lease rate

Assignment Help Financial Management

Reference no: EM13848164

Suppose Netflix is considering the purchase of computer servers and network infra- structure to facilitate its move into video-on-demand services. In total, it will purchase $48 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 five years. However, because of the firm’s substantial loss carry forwards, Netflix estimates its marginal tax rate to be 10% over the next five years, so it will get very little tax benefit from the depreciation expenses. Thus, Netflix considers leasing the equipment instead. Suppose Netflix and the lessor face the same 8% borrowing rate, but the lessor has a 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 Netflix with this lease rate?

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

Reference no: EM13848164

Questions Cloud

Planning to save for retirement-withdrawal period : You are planning to save for retirement over the next 35 years. To do this, you will invest $870 per month in a stock account and $470 per month in a bond account. The return of the stock account is expected to be 10.7 percent, and the bond account w..

Future value-how much will you have if you make deposits : If you deposit $5,500 at the end of each of the next 15 years into an account paying 11.3 percent interest, how much money will you have in the account in 15 years? How much will you have if you make deposits for 30 years?

What is it about the firms that use low amounts of debt : There are several industries with low percentages of debt financing. Take a look and identify some with a low percentage of debt financing and do the same with firms that have a high percentage of debt financing. Based on the types of firms that use ..

What is the present value of the annuity : A 10-year annuity pays $1,850 per month, and payments are made at the end of each month. If the interest rate is 12 percent compounded monthly for the first five years, and 8 percent compounded monthly thereafter, what is the present value of the ann..

What is the gain to netflix with this lease rate : Suppose Netflix is considering the purchase of computer servers and network infra- structure to facilitate its move into video-on-demand services. In total, it will purchase $48 million in new equipment. What is the lease rate for which the lessor wi..

Fixed-rate mortgage to buy new home-balloon payment : You need a 35-year, fixed-rate mortgage to buy a new home for $310,000. Your mortgage bank will lend you the money at an APR of 6.05 percent for this 420-month loan. How large will this balloon payment have to be for you to keep your monthly payments..

Computer equipment on straight-line basis : Suppose Clorox can lease a new computer data processing system for $975,000 per year for five years. Alternatively, it can purchase the system for $4.25 million. If Clorox will depreciate the computer equipment on a straight-line basis over the next ..

Default would equity holders preference for leasing plane : Western Airlines is considering a new route that will require adding an additional Boeing 777 to its fleet. Western can purchase the airplane for $225 million or lease it for $25 million per year. As a one-year decision, does purchasing or leasing th..

What is the future value-interest rate : What is the future value of $2,900 in 19 years assuming an interest rate of 8.2 percent compounded semiannually?

User Account

All Pages