Airplane Leasing Analysis
The Boeing 747-8 is a Dreamliner plane with a 4 X General Electric GEnx 2B67 engine that has a powerful force of 66,500 pounds and can travel at a top speed of 564 Knots (“Boeing: Commercial,” 2020). The plane costs $ 351,400,000 with a maximum weight load of 75,000 Kgs and can carry up to 420 passengers (“Boeing 747-8 – Price, Specs, Photo Gallery, History – Aircraft Compare”, 2020). In addition, the operation cost of flying the plane translates to $ 19,253.37 per hour, and the average insurance cost per trip is $ 1060 (Company, 2020). From the financials, in order to calculate the before-tax rental price of the lease, the analysis assumed a tax rate of 35% which is the income tax rate in the country before the implementation of the Tax Cuts and Job Act in 2017. Consequently, the analysis used a 7% discount rate which is the average discount rate accepted by investors.
Calculation of After-Tax Leasing Payment
The plane was depreciated using the MACRS 20-year depreciation schedule, and the total present value of the depreciation tax shield stood at $ 66,252,011.90. Consequently, the present value of after-tax cost was calculated to be $ 72,947,164.00.
The MACRS Depreciation Schedule, the depreciation tax shield calculation, and the after-tax cost are calculated as shown by the schedule below.
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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Question
Write a 3-4 pg. Case project Report for the under-listed case
Case: Airplane Leasing Analysis—determine the after-tax and before-tax leasing payment