Airplane Leasing Analysis

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 747-8 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 747-8 insurance cost”

3) Depreciation (assume 20 year schedule)

Year	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*(1-T)= 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*(1-T)=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=-357-119.28+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/(1-T)=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