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

22,841,00

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.

– 72,947,164.0

66,252,011.9

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

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

Airplane Leasing Analysis

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

Airplane Leasing Analysis