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

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

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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