Question

You work as a financial analyst for RBC. Your company is considering buying an airplane and then lease it to Delta Air Lines. Your task is to determine the before tax leasing payment
You may choose an airplane of your choice (747, 767, 777, 787)
Assume 20 year depreciation period in your lease analysis.
Make your assumptions about tax rate, required rate of return,plane cost and salvage value.

Answer 1

Let the cost of the plane be $100 million

The salvage value of plane after 20 years be $10 million

The tax rate applicable be 40%

Required rate of return is 12%

The Lease payment can be calculated by the formula: P = [(CC * (1 + r)^n – SV) * r] / [(1 + r)^n – 1]

Where,

P= Monthly payment

CC = Capitalized Cost

r = Monthly rate of interest = Annual Rate / 12

n = No. of months of lease = No. of years * 12

SV = Salvage Value of the equipment

Hence, P = [100 * (1+ 0.02)^120 – 10] * 0.02 / [(1 + 0.02)^120 – 1]

                = 2.18 million

Hence the before tax leasing payment is $2.18 million.