Problem
A. Calculate the net advantage to leasing. Use the expected residual value residual value and assume the airline can use all the tax benefits of ownership. The tax rate at the time was 40%. Assume straight-line depreciation to the expected residual value.
B. Calculate the net advantage to leasing. Assume the airline cannot use any of the tax benefits of ownership and the residual value is (a) the expected residual value, (b) $50 million, and ($100 million).
C. Determine the residual value that would make the net advantage to leasing equal to zero, assuming the airline cannot use any tax benefits of ownership.
D. Suppose the airline believes it will not be in a tax paying position for a decade or longer. Should it lease, borrow, or buy?
E. Suppose the airline believes it will not be in a tax-paying position for a decade or longer, and this lease includes the option to terminate the lease at any time without penalty. Should it lease, borrow, or buy?
F. Use any net advantage to leasing (NAL) formula you prefer (this will require research) Determine the cost per airplane and in total. Remember these are quarterly payments over 15 years, so the n would be 60 not 15.
G. Assume the airline will use the 80% value on fully secured debt. Calculate the probabilities for some of the questions to determine the salvage value. Remember the tax rate and the tax deduction.