Wingspan, Inc. is a start-up airline that is considering

| June 8, 2016

Question
Assessment 5 Instructions

Wingspan, Inc. is a start-up airline that is considering whether it should lease or buy its Boeing 737-700 plane from Boeing.

Asset Cost: $68 million for Wingspan. Since Boeing is the manufacturer of the plane, their cost will be 85% of the cost for Wingspan.

The length of the lease is eight years and commercial airplanes fall in the 7-Year MACRS depreciation class. At the end of the lease, the plane is expected to be worth $22 million. You will need to incorporate the net cash from selling the plane in Year 8. The net cash is equal to the sales price ($22 million) multiplied by (1-tax rate). Do not deduct sales price from the asset cost for the purpose of depreciation.

Depreciation Schedule
Year 1 14.29%
Year 2 24.49%
Year 3 17.49%
Year 4 12.49%
Year 5 8.93%
Year 6 8.92%
Year 7 8.93%
Year 8 4.46%

Lease Term: 8 Years
Lease Payment: $7.2 million per year, at the beginning of years 0, 1, … ,7.
Asset Residual Value: $22 million
Boeing Tax Rate: 26%
Boeing Interest Cost: 3.4%
Wingspan Tax Rate 15%
Wingspan Interest Cost: 6.5%
1. Given the above terms, should Wingspan lease the plane or purchase it?
2. What is the maximum annual rental amount that Wingspan should be willing to pay?
3. What is the minimum annual rental amount that Boeing should accept?
.coursehero.com/tutors-problems/Finance/8736886-Assessment-5-Instructions-Wingspan-Inc-is-a-start-up-airline-that/”>Attachment 1
.coursehero.com/tutors-problems/Finance/8736886-Assessment-5-Instructions-Wingspan-Inc-is-a-start-up-airline-that/”>Attachment 2
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Assessment 5 Instructions.docx

Assessment 5 Instructions
Wingspan, Inc. is a start-up airline that is considering whether it should lease or buy its Boeing
737-700 plane from Boeing.
Asset Cost: $68 million for Wingspan. Since Boeing is the manufacturer of the plane, their
cost will be 85% of the cost for Wingspan.
The length of the lease is eight years and commercial airplanes fall in the 7-Year MACRS
depreciation class. At the end of the lease, the plane is expected to be worth $22 million. You
will need to incorporate the net cash from selling the plane in Year 8. The net cash is equal to
the sales price ($22 million) multiplied by (1-tax rate). Do not deduct sales price from the asset
cost for the purpose of depreciation.
Depreciation Schedule1
14.29
Year 1
%
24.49
Year 2
%
17.49
Year 3
%
12.49
Year 4
%
Year 5
8.93%
Year 6
8.92%
Year 7
8.93%
Year 8
4.46%

Lease Term:

8 Years

Lease Payment:

$7.2 million per year, at the beginning of years 0, 1, ,7.

Asset Residual Value: $22 million
Boeing Tax Rate:

26%

Boeing Interest Cost:

3.4%

Wingspan Tax Rate

15%

Wingspan Interest Cost:

6.5%

1. Given the above terms, should Wingspan lease the plane or purchase it?
2. What is the maximum annual rental amount that Wingspan should be willing to pay?

1 Depreciation Schedule for 7-Year Property, Half-Year Convention, from IRS Publication 946 Additional
Information, Appendix A

3. What is the minimum annual rental amount that Boeing should accept?

.0001pt”>Assessment 5 Instructions
Wingspan, Inc. is a start-up airline that is considering whether it should lease or buy its Boeing 737-700 plane from Boeing.

Asset Cost: $68 million for Wingspan. Since Boeing is the manufacturer of the plane, their cost will be 85% of the cost for Wingspan.

The length of the lease is eight years and commercial airplanes fall in the 7-Year MACRS depreciation class. At the end of the lease, the plane is expected to be worth $22 million. You will need to incorporate the net cash from selling the plane in Year 8. The net cash is equal to the sales price ($22 million) multiplied by (1-tax rate). Do not deduct sales price from the asset cost for the purpose of depreciation.

Depreciation Schedule.docx#_ftn1″ title=””>[1]

Year 1

14.29%

Year 2

24.49%

Year 3

17.49%

Year 4

12.49%

Year 5

8.93%

Year 6

8.92%

Year 7

8.93%

Year 8

4.46%

Lease Term: 8 Years

Lease Payment: $7.2 million per year, at the beginning of years 0, 1, … ,7.

Asset Residual Value: $22 million

Boeing Tax Rate: 26%

Boeing Interest Cost: 3.4%

Wingspan Tax Rate 15%

Wingspan Interest Cost: 6.5%

1. Given the above terms, should Wingspan lease the plane or purchase it?

2. What is the maximum annual rental amount that Wingspan should be willing to pay?

3. What is the minimum annual rental amount that Boeing should accept?

.docx#_ftnref1″ title=””>[1] Depreciation Schedule for 7-Year Property, Half-Year Convention, from IRS Publication 946 –Additional Information, Appendix A

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