25-10. Suppose Microsoft 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 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 carryforwards, Microsoft 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, Microsoft considers leasing the equipment instead. Suppose Microsoft 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 Microsoft with this lease rate? Gan from fox rateb. At a lease rate of $1 1.080 and a tax rate of 10%, Microsoft has a gain of $0.145 million. LESSEE rD 8% tca 10% 7.200% Buy: Year 0 2 3 4 5 1 Capital Expenditures 2 Depreciation tax shield at 10% (48,000) 3 Free Cash Flow (Buy) 960 1,536 922 553 553 276 Lease: (47,040) 1,536 922 553 553 276 4 Lease payments 5 Income tax savings at 10% (11,080) (11,080) (11,080) (11,080) (11,080) 1,108 6 1,108 Free Cash Flow (Lease) 1,108 1,108 1,108 (9,972) Lease vs. Buy: (9,972) (9,972) (9,972) (9,972) 7 Lease - Buy 37,068 NPV(Lease-Buy) (11,508) (10,894) (10,525) (10,525) 145 (276)