Applying the capital lease criteria. Boeing manufactures a jet aircraft at a cost of $50 million. The usual selling price for this aircraft is $60 million, and its typical useful life is 25 years. American Airlines desires to lease this aircraft from Boeing. The parties contemplate the following alternatives for structuring the lease. Indicate whether each arrangement qualifies as an operating lease or a capital lease. Assume that all cash flows occur at the end of each year.

a. American will lease the aircraft for 20 years at an annual rental of $6 million. At the end of 20 years, American will return the aircraft to Boeing. The interest rate appropriate to a 20-year collateralized loan for American is 10 percent.

b. American will lease the aircraft for 15 years at an annual rental of $7.2 million. At the end of 15 years, American will return the aircraft to Boeing. The interest rate appropriate for a 15-year collateralized loan for American is 10 percent.

c. American will lease the aircraft for 10 years at an annual rental of $5.5 million. At the end of 10 years, American has the option of returning the aircraft to Boeing or purchasing it for $55 million. The interest rate appropriate for a 10-year collateralized loan for American is 8 percent.

d. American will lease the aircraft for 18 years at an annual rental of $6.2 million, and will return the aircraft at the end of the lease term. In addition, American will pay a fee of

$1,500 per hour for each hour over 5.000 hours per year that American flies the aircraft.

American's average usage of its aircraft is currently 6,200 hours per year. The interest rate appropriate for an 18-year collateralized loan for American is 10 percent.