Lisa M. has been asked to operate a Beaver bush plane for a mining company exploring in
Question:
Lisa M. has been asked to operate a Beaver bush plane for a mining company exploring in Yukon. Lisa will have a 5-year contract with the mining company. The mining company will commit to use the plane for 5 years.
Lisa M. has the following choices:
- Buy the plane for $500,000
- Arrange a 5-year, non-cancellable, net financial lease at a rate of $75,000 per year, paid in advance
How would you advise Lisa M, the charter company’s CEO? Assume that the CCA rate is 25% and Lisa has many other airplanes in its asset pool. The first CCA deduction is made at the end of the first year. The company’s tax rate is 35%. The weighted-average cost of capital for the bush plane business is 14%, but Lisa can borrow at 9%.
Lisa thinks the plane will be worth $300,000 after 5 years.
If Lisa takes the 5-year financial lease. Lisa must cover the operating costs of the plane. Assume that the operating costs are identical whether Lisa buys or leases the plane.
**Could you please show the answers and calculations in most clean and easy format? Thank you in advance
Principles of Corporate Finance
ISBN: 978-0072869460
7th edition
Authors: Richard A. Brealey, Stewart C. Myers