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Suppose Amazon is considering the purchase of computer servers and network infrastructure to expand its very...

Suppose Amazon is considering the purchase of computer servers and network infrastructure to expand its very successful businesses offering cloud-based computing. In total it will purchase 48.7 million in new equipment. The 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. Amazon considers leasing the equipment instead suppose Amazon and the lessor face the same 7.8% 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 Amazon with the lease rate?

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

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Answer #1

MARGINAL TAX RATE MISSING, BUT I DID SAME TYPE OF SUM EARLIER WITH 10% TAX. IF IT IS DIFFERENT, LET ME KNOW. WILL CHANGE ACCORDINGLY.

SEE THE IMAGE. ANY DOUBTS, FEEL FREE TO ASK. THUMBS UP PLEASE

Home nert Page Layout Formulas Data Review View dd-Ins Delete Format @ntosum.剑7 A ー E ゴWrap Text copy ▼ ,_a. ars- ..困Merge & Center, 函Merge & Center, 弼,8 Conditional Format-eCell conditional aFon nat, sCell- B 1 u. $, % , il Insert Delete Format Insert Sort &Find & 2 ClearFe Select = $ , % , ▼ ㆆ ▼ Clipboard Number C156 138 139 140 141 il12 143 144 145 146 147 BUY PURCHASE OF EQUIPMENT DEPRECIATION TAX SHIELD FREE CASH FLOW PV FACTOR @ 5.07% PV OF FCF 0 4 -48700000 409000 5454400 3272640 19635841963584 981792 45291000 5454400 3272640 1963584 1963584981792 0.7809 0.9517 0.9058 0.8205 45291000.00 5191205.86 2964427.07 1692829.77 1611144.73 766700.64-33064691.93 LEASE LEASE PAYMENT X (1-TAX RATE) X PVI FAD @5.07%, 5 YEARS : PV OFFCF LEASE PAYMENTX (1-0.35) x 4.5402 33064691.93 LEASE PAYMENT BREAKEVEN LEASE 11204078.41 11204078.41 149 a 150 151 NOTE DEPRECIATION COST 48700000 TAX SAVING AT 35% 5.76% 9740000 15584000 9350400561024056102402805120 981792 11.52% 409000 5454400 3272640 19635841963584 $4.5402 20% 32% 19.20% 11.52% 153 155 NOTE 1 156 4 H KE CA RATE = 7.8%(1-0.35)-5.07% NOTE 2 EXCEL ; PVIFAD @5.07%, 5 YEARS PV(5.07%,5-1,, 1) . PM UTILITY, SHARPE, beta bond cove ty DGM port future INDEX INTL CAP BUD LEASING PV, FV, ANNUITY DIR ght dean YELD bond porti i cap str WACC RESI ex 130% 31-01-2019Home nert Page Layout Formulas Data Review View dd-Ins Cut Σ AutoSum ー E ゴWrap Text ta copy. в 1 프 . Ej-., Δ. : rーー 逻锂函Merge & Center. $, % , 弼,8 Conditional Format eCell Insert Delete Format Sort &Find & 2 ClearFe Select Editing Format Painter Formatting, as Table w styles. ▼ ㆆ ▼ Clipboard Alignment Number Cells F176 Formula Bar 158 BUY 159 PURCHASE OF EQUIPMENT 160 161 DEPRECIATION TAX SHIELD (10%) 162 FREE CASH FLOW 163 PV FACTOR @ 7.02% 164 PV OF FCF 165 166 NET COST OF PURCHASE- 167 NET COST OF LEASING 168 NET GAIN 169 170 THE SOURCE OF GAIN IS DIFFERENCE IN TAX RATES 0 48700000 4 974000 1558400 47726000 1558400 0.9344 935040 935040 0.8731 561024 561024 0.8158 561024 561024 0.7623 280512 280512 0.7123 47726000.00 1456176.42 816394.93457705.99 427682.67 199814.37-44368225.63 -44368225.63 .44223954.03 (-11204078.41 X (1-0.10) X PVIFAD @7.02%, 5 YEARS) 144271.60 172 173 RATE= 7.8%*(1-0.10)-7.02% 174 175 176 4 H KE CAPM UTILITY, SH EXCEL : PVIFAD @7.02%, 5 YEARS = $4.3857 PV(5.07%,5,-1,1) beta bond c future INDEX INTL CAP BUD LEASING PV, FV, ANNUITYDIR cleanYIELD bond stru WACC RES1 ex di 福 130% 31-01-2019

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