02 May Write a 3-4 pg. Case project Report for the under listed case? Case: Airplane Leasing Analysisdetermine the after-tax and before-tax leasing paymentcaseoutlineairplaneleasingbreakeve

Write a Case project Report for the under listed case

Case: Airplane Leasing Analysis—determine the after-tax and before-tax leasing payment

You work as a financial analyst for RBC. Your company is considering buying an airplane and then leasing it to Delta Air Lines. Your task is to determine the before-tax leasing payment.

You may choose an airplane of your choice (767, 777, 787)

Assume 20 year depreciation period in your lease analysis using the depreciation table in the notes or straight-line depreciation method.

Make your assumptions about the tax rate, required rate of return, insurance cost, maintenance and operating costs, and salvage value. (Please use Google Search to help you with the airplane price, expenses, maintenance cost, insurance cost, and depreciation value.)

You final report will be in a word document, not the excel file. You may copy and paste the excel file or take a photo shot and include it in the word file. If you have difficulty transporting your Excel calculation, than you may follow my example document to present your calculations.

1. Description of your airplane

2. Explanation of your assumption of the parameters such as tax rate, required rate of return, …

3. Explanation of your calculation of after tax leasing payment

4. your final calculation of before tax break even leasing payment.

Note: Follow the notes on Break Even Rent Example for reference

,

To help you understand how to perform Airplane Leasing Break Even payment analysis, I am providing the following example for your reference. For your case, you will have to choose other models.

1) Buying cost of Boeing 747-8 airplane

2) Maintenance cost

Assume the plane will be used 500 hours per year and 50 trips per year (you may work harder by assuming a higher number) Google Search “Boeing 747 maintenance cost”, I got the following

Google “Boeing 747-8 insurance cost”

3) Depreciation (assume 20 year schedule)

Year	20 years
1	3.75%
2	7.22%
3	6.68%
4	6.18%
5	5.71%
6	5.29%
7	4.89%
8	4.52%
9	4.46%
10	4.46%
11	4.46%
12	4.46%
13	4.46%
14	4.46%
15	4.46%
16	4.46%
17	4.46%
18	4.46%
19	4.46%
20	4.46%
21	2.23%

4) Salvage value

Assume 10% of the initial value after 25 years of services

Apply Method 2 discussed in the chapter note: After Cash Flow Method to calculate the cost: Calculate the PV of each of the following four items: Buying, Expenses and Costs, Depreciation Tax Shield, and salvage 1)      Buying of the equipment: -357 million 2） Maint.,Ins, and Selling cost will add to the cost: Using the number found from Google search: Operating Cost=Operating cost per hour*Hours per year=$24,000*500=12000000 Insurance cost=Insurance per trip*number of trip per year=$2175*50=108750

Total Cost=12108750

Please note this cost is incurred in the beginning of each period T= 0 1 2 … 24 25

Costs (million) 12.10875 12.10875 12.10875 … 12.10875 0

After Tax Cost 9.48 9.48 9.48 … 9.48 0 Note: after tax cost is calculated as 12,108,75000*(1-T)= 12,108,75000*(1-.21)=9.48 (million)

Now calculate PV: PV(r=7%,PMT=9.48,n=25,BEGing)=-119.28 Million

3)      The depreciation tax saving will reduce the cost: Depreciation base: $357 million

Assume 7% cost of capital

Time		1	2	3	4	5	6	7
Depreciation schedule	0.0375	0.0722	0.0668	0.0618	0.0571	0.0529	0.0489
Depreciation	-13.388	-25.775	-23.848	-22.063	-20.385	-18.885	-17.457
Dep Tax Shield	2.811	5.413	5.008	4.633	4.281	3.966	3.666
PV(7%)	2.627	4.728	4.088	3.535	3.052	2.643	2.283
Time		8	9	10	11	12	13	14
Depreciation schedule	0.0452	0.0446	0.0446	0.0446	0.0446	0.0446	0.0446
Depreciation	-16.136	-15.922	-15.922	-15.922	-15.922	-15.922	-15.922
Dep Tax Shield	3.389	3.344	3.344	3.344	3.344	3.344	3.344
PV(7%)		1.972	1.819	1.700	1.589	1.485	1.388	1.297
Time		15	16	17	18	19	20	21
Depreciation schedule	0.0446	0.0446	0.0446	0.0446	0.0446	0.0446	0.0223
Depreciation	-15.922	-15.922	-15.922	-15.922	-15.922	-15.922	-7.961
Dep Tax Shield	3.344	3.344	3.344	3.344	3.344	3.344	1.672
PV(7%)		1.212	1.133	1.059	0.989	0.925	0.864	0.404

PV=2.811/1.07+5.413/1.07^2+5.008/1.07^3+4.633/1.07^4+4.281+…

PV=2.62745 +4.72778 +4.08802 +3.5346 +3.05214

+2.64266+2.28302+1.97222+1.81873+1.69975+1.58855+1.48463+1.38750+1.29673+1.21190+1.13261+1.05852+0.98927+0.92455+0.86407+0.40377=40.788 million

Note: For simplicity, you may use straight line depreciation method as follows:

Suppose the airplane costs $357 million

Depreciation base: 357, for 20 years, Dep per year=357/20=17.850

Tax Shield per year=Dep*T=17.85*21%=3.749

Now calculate PV of Dep Tax Shield=PV(r=7%,n=20,PMT=3.749)=$39.71 million

4) Salvage Value will reduce the total cost

10% of the purchase price=$35.7 million

After tax Cash Flow=$35.7*(1-T)=35.7*(1-.21)=28.203 million

PV=28.203/1.07^25= 5.1964

Now put all these costs together:

Total PV of Cost=-357-119.28+40.788+5.1964=430.2956 million

How much do you have to charge the rent per year to cover the total cost of 430.2956?

Find Break even Rent

Using a financial calculator, PMT(PV=-430.2956, r=7%,n=25, beginning Yr)=34.5083 million

How much do I have to receive per year before tax so that I will have the above rent after tax?

X—before tax leasing charge

Tax at 21% — .21X

After tax X-.21X=X(1-.21)

After Tax leasing payment =34.5083

X= After Tax leasing payment/(1-T)=34.5083/(1-.21)

X=34.5083/.79=43.6814 million

The answer: You have to charge $43.6814 million before tax

Verify the numbers: Before tax rent: 43.6814

Tax (at 21%) -9.1731

After Tax Rent: 34.5083