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## Airplane Leasing Analysis

The Boeing 747-8 is a Dreamliner aircraft with four General Electric GEnx 2B67 engines, each of which can propel the aircraft at high speed of 564 knots and exert a tremendous 66,500 pounds of thrust each (“Boeing: Commercial,” 2020). The aircraft can accommodate 420 passengers and costs \$ 351,400,000 (“Boeing 747-8 – Price, Specs, Photo Gallery, History – Aircraft Compare”, 2020). Its maximum weight load is 75,000 Kg. The average insurance cost for every flight is \$ 1060 while operating the plane costs \$ 19,253.37 per hour (Company, 2020). The analysis used the financials to compute the lease’s before-tax rental price, assuming that the country’s income tax rate would be 35% before the 2017 implementation of the Tax Cuts and Job Act. Because 7% is the typical discount rate accepted by investors, that rate was used in the analysis.

### Calculating the Leasing Payment After Tax

The MACRS 20-year depreciation schedule was used to calculate the plane’s depreciation and the total present value of the depreciation tax shield was \$ 66,252,011.90. As a result, it was determined that the present value of the after-tax cost was \$72,947,164.00.

The schedule below demonstrates how the MACRS Depreciation Schedule, Depreciation Tax Shield computation, and After-Tax Cost are computed.

 Initial Cost Year 0 351,400,000 Year 1 Year 2 Year 3 Maintenance cost/hour 19,253.37 19,253.37 19,253.37 19,253.37 Total hours worked per year 500 500 500 500 Total Maintenace cost 9626685 9626685 9626685 9626685 Average Insurance cost per trip 1060 1060 1060 1060 Number of trips 50 50 50 50 Total Insurance cost 53000 53000 53000 53000 Total cost 9679685 9679685 9679685 9679685 After-Tax Cost 6291795.25 6291795 6291795 6291795 Present value of After-tax cost 6291795.25 5880182 5495498 5135979 Depreciation 0 13177500 25371080 23473520

 Depreciation tax shield 0 4612125 8879878 8215732 Present value of Depreciation tax shield 4310397 7756029 6706485

 Initial Cost Year 4 Years 5 Year 6 Year 7 Maintenance cost/hour 19,253.37 19,253.37 19,253.37 19,253.37 Total hours worked per year 500 500 500 500 Total Maintenace cost 9626685 9626685 9626685 9626685 Average Insurance cost per trip 1060 1060 1060 1060 Number of trips 50 50 50 50 Total Insurance cost 53000 53000 53000 53000 Total cost 9679685 9679685 9679685 9679685 After-Tax Cost 6291795.25 6291795 6291795 6291795 Present value of After-tax cost 4799980.471 4485963 4192489 3918214 Depreciation 21716520 20064940 18589060 17183460 Depreciation tax shield 7600782 7022729 6506171 6014211 Present value of Depreciation tax shield 5798600.196 5007109 4335336 3745348 Year 8 Year 9 Year 10 Year 11 Initial Cost Maintenance cost/hour 19,253.37 19,253.37 19,253.37 19,253.37 Total hours worked per year 500 500 500 500 Total Maintenace cost 9626685 9626685 9626685 9626685 Average Insurance cost per trip 1060 1060 1060 1060 Number of trips 50 50 50 50 Total Insurance cost 53000 53000 53000 53000 Total cost 9679685 9679685 9679685 9679685 After-Tax Cost 6291795 6291795 6291795 6291795 Present value of After-tax cost 3661882 3422320 3198430 2989187 Depreciation 15883280 15672440 15672440 15672440 Depreciation tax shield Present value of Depreciation tax shield 5559148   3235475 5485354   2983669 5485354   2788476 5485354   2606052

Year 12        Year 13         Year 14        Year 15

 Initial Cost 19,253.3 19,253.3 19,253.3 19,253.3 Maintenance cost/hour 7 7 7 7 Total hours worked per year 500 500 500 500 Total Maintenace cost 9626685 9626685 9626685 9626685 Average Insurance cost per trip 1060 1060 1060 1060 Number of trips 50 50 50 50 Total Insurance cost 53000 53000 53000 53000 Total cost 9679685 9679685 9679685 9679685 After-Tax Cost 6291795 6291795 6291795 6291795 Present value of After-tax cost 2793632 2610871 2440067 2280436 1567244 1567244 1567244 1567244 Depreciation 0 0 0 0 Depreciation tax shield 5485354 5485354 5485354 5485354 Present value of Depreciation tax shield 2435563 2276227 2127315 1988145

 Initial Cost Year 16 Year 17 Year 18 Year 19 19,253.3 19,253.3 19,253.3 Maintenance cost/hour 19,253.37 7 7 7 Total hours worked per year 500 500 500 500 9,626,68 9,626,68 9,626,68 Total Maintenace cost 9,626,685 5 5 5 Average Insurance cost per trip 1,060 1,060 1,060 1,060 Number of trips 50 50 50 50 Total Insurance cost 53,000 53,000 53,000 53,000 Total cost 9,679,685 9679685 9679685 9679685 After-Tax Cost 6,291,795 6291795 6291795 6291795 Present value of After-tax cost 2,131,249 1991821 1861515 1739734 15,672,44 1567244 1567244 1567244 Depreciation 0 0 0 0 5,485,35 Depreciation tax shield 5,485,354 4 5485354 5485354 1,736,52 Present value of Depreciation tax shield 1,858,079 3 1622918 1516746 Year 20 Initial Cost Maintenance cost/hour 19,253.37 Total hours worked per year 500 Total Maintenace cost 9,626,685 Average Insurance cost per trip 1,060

Number of trips                                                     50

Total Insurance cost                                                     53,000

Total cost                                                                    9,679,685

After Tax Cost                                                           6,291,795

Present value of After-tax cost                           1,625,919

Depreciation                                                           15,672,440

Depreciation tax shield                                        5,485,354

Present value of Depreciation tax

shield                                                                           1,417,520

The present value of the depreciation tax shield is calculated as follows;

= summation of the present value of depreciation tax shield from year 1 to 20

= 4310397 + 7756029 + 6706485 + 5798600.196 + 5007109 + 4335336 + 3745348 + 3235475 +

2983669 +2788476 + 2606052 +2435563 + 2276227 + 2127315 + 1988145 +1,858,079

+1,736,523 +1622918 + 1516746 + 1,417,520

= 66,252,011.90

Calculation of the present value after-tax cost:

= summation of present value after-tax cost from year 1 to 20

= 6291795.25 + 5880182 + 5495498 + 5135979 + 4799980.471 + 4485963 + 4192489 +

3918214 + 3661882 + 3422320 + 3198430 + 2989187 + 2793632 +2610871 + 2440067 +

2280436 + 2,131,249 + 1991821 + 1861515 +1739734 + 1,625,919

= 72,947,164

Using 10% of the cost as salvage value, the present value of after-tax cash flow is calculated as follows

Salvage value After-tax cash flow (tax rate @ 35%)

3,5140,00

0

22,841,00

0

The present value at a 7% discounting

rate                                                                      5,902,548

Hence, the present value of total cost is calculated by summing up the present value of after-tax cost, the present value of the depreciation tax shield, and the present value tax shield as follows.

Total Present Value of Cost Initial cost

Present Value of After-Tax Cost

Present value of Depreciation tax shield

351,400,000.

00

– 72,947,164.0

0

66,252,011.9

0

Present Value of salvage value   5,902,548.44

Total Present Value of Cost       350,607,397

From the financial calculator, the break-even rent payment is calculated using PMT( PV=

-350,607,397, R=7%, N=20,Beginning of the year payment) which gives \$ 28,117,572 as shown below.

Break-Even Rent

\$28,117,572.0                                                                                                                                                                                          0

Consequently, using the break-even rent to calculate the lease to be charged for the plane, all tax inclusive, as shown by the calculation below.

Rent for tax inclusive

Rent after tax

\$28,117,572.0

0

Tax rate                        35%

Rent before tax

\$43,257,803.0 8

## References

Boeing 747-8 – Price, Specs, Photo Gallery, History – Aircraft Compare. Aircraft Compare. (2020). Retrieved 6 November 2020, from https://www.aircraftcompare.com/aircraft/boeing-747-8/#:~:text=Current%20Cost

%20%24%20351.4%20million%20U.S.

Boeing: Commercial. Boeing.com. (2020). Retrieved 6 November 2020, from https://www.boeing.com/commercial/.

The company, S. (2020). Ownership and Operating Costs | BOEING 747-400.

Aircraftcostcalculator.com. Retrieved 6 November 2020, from https://www.aircraftcostcalculator.com/AircraftOperatingCosts/380/Boeing+747-

400#:~:text=Based%20on%20450%20annual%20owner,down%20to%20%2419%2C253.37%20per%20hour.

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Airplane Leasing Analysis

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

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