Netflix is considering the purchase of $48 million special software. This software will qualify for CCA deductions at a rate of100%. Netflix estimates its marginal tax rate to be10% over the next fiveyears. Netflix considers leasing the software instead. Suppose Netflix and the lessor face the same8% borrowingrate, but the lessor has a40% tax rate. Assume the software is worthless after fiveyears, the lease term is fiveyears, and the lease qualifies as a true tax lease.

a.What is the lease rate for which the lessor will breakeven?

b.What is the gain to Netflix with this leaserate?

c.What is the source of the gain in thistransaction?