Airplane Leasing Analysis

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