SOLVE IN EXCEL

Hemp Airlines $($HA$,"$we fly high"$)$ is about to buy five CFA$3000$ commuter jets. Each airplane

costs $$50$ million. A friendly bank has put together a consortium to finance the deal. The consortium

includes a $20\%$ equity investment and an $80\%$ debt component. The debt has an interest rate of $8\%$

annually and is a term loan over $10$ years. At the end of each of the next $10$ years, HA will pay a

lease payment of $$35$ million. At the end of the $10-$year lease term, Hemp has the option to buy the

aircraft for $$10$ million each; it is anticipated that it will exercise this option in which the planes are

priced at their anticipated fair market value. The airplanes will be depreciated on a straight$-$line

basis over five years to zero salvage value.

If the equity partner in the lease has a tax rate of $35\%,$ what is its expected compound

rate of return?