Suppose Netflix is considering the purchase of special software to facilitate its move intovideo-on-demand services. Intotal, the firm will purchase$48 million in new software. This software will qualify for CCA deductions at a rate of100%. However, because of thefirm's substantial losscarryforwards, Netflix estimates its marginal tax rate to be10% over the next fiveyears, 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 same8% borrowingrate, but the lessor has a40% tax rate. For the purpose of thisquestion, 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?