Question

In 2017, the New England Patriots purchased two Boeing 767 planes for approximately $10 million, becoming the first National Football League (NFL) franchise to do so. The team will use the planes to travel round trip to its ten away games (and to any potential playoff or Super Bowl games) during the 2017 – 2018 season. Like other NFL teams, if the franchise did not own these planes, the team would charter (rent) planes for team travel. These charters would have cost the Patriots approximately $4 million for the season. When the planes are not in use by the team, the Patriots management may rent out the planes to other parties.

Answer the following questions:

What are some potential costs involved in owning the planes?

What are some potential costs of chartering (renting) planes instead of owning them?

Which option do you think is the better option, buying the planes or leasing them? What's the basis for your opinion?

Answer 1

If the company owns the two Boeing 767 planes, it will cost the company $10 million. This is the initial investment at time 0. Other than the investmnt cost, the cmpany will charge depreciation to the planes every year till the life of the planes. Hence the potential costs involved with owning the planes will be the initial investment , annual depreciation and annual maintenance costs.

If the company leases them instead of owing them , the potential costs involved would be rental charges of $4 million for the season, along with any maintenance costs.

The option of buying or leasing will depend on the cost of capital which is used to discount the cash flows. The option with a lower present vale of cash outflows will be chosen. Most probably option of lease will be chosen because the cost of $10 million can be avoided.