Suppose BMI Regional is considering the purchase of new airplanes to facilitate the operation of new routes. In total, it plans to purchase a new airline fleet for $5.0 million. This fleet will qualify for accelerated depreciation: 20% can be expensed immediately, followed by 32%, 19.2%, 11.52%, 11.52%, and 5.76% over the next five years. However, because of the airlines’ substantial loss carryforwards, BMI Regional estimates its marginal tax rate to be 10% over the next five years, so it will get a very little tax benefit from the depreciation expenses. Thus BMI Regional considers leasing the airplanes instead. Suppose BMI Regional and the lessor face the same 4.5% borrowing rate, but the lessor has a 40% tax rate. For the purpose of this question, assume the fleet will be worthless after 5 years, the lease term is 5 years, and the lease qualifies as a true tax lease.

(a) What is the pre-tax lease rate for which the lessor will break even? The lease rate is $. (round to $ million, three decimals, don't enter minus)

(b) What is the free cash flow of the lease for BMI Regional? The FCF of the lease is $. (round to $ million, three decimals, don't enter minus)

(c) What is the NPV(lease-buy) for BMI Regional with this lease rate? The NPV(lease-buy) is $. (round to $ million, three decimals, if result negative, use minus sign) (d) Should BMI Regional lease or buy? BMI Regional should. (fill in "lease" or "buy")

Answer rating: 100% (QA)

Solution a Calculation of the Pretax Lease Rate for which the Lessor will Break Even Depreciation Am... View the full answer