02 May Write a 34 pg. Case project Report for the under listed case? Case: Airplane Leasing Analysisdetermine the aftertax and beforetax leasing paymentcaseoutlineairplaneleasingbreakeve
Write a 34 pg. Case project Report for the under listed case
Case: Airplane Leasing Analysis—determine the aftertax and beforetax leasing payment
Write a Case project Report for the under listed case
Case: Airplane Leasing Analysis—determine the aftertax and beforetax 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 beforetax 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 straightline 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 7478 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 7478 insurance cost”
3) Depreciation (assume 20 year schedule)
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*(1T)= 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*(1T)=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=357119.28+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/(1T)=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
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