2. Lease vs. Buy Analysis Lease Case

South TX. Airlines (STL) is planning to lease a new Boeing 737 Max from a lessor in Ireland. Following are the terms of the deal Monthly Lease Rate: 0.800% of price of the aircraft Price of A/C: $50M Life of lease: 12 Years

Return costs at end of lease: $5M

STL uses a discount rate of 5% evaluate its investment decisions, and is in the 15% tax bracket

Questions

• Please build a 12 year analysis which shows the cashflows of this leasing arrangement ?

• Calculate the NPV of this structure ?

  The lessor is able to renew the lease in Year 12, at a monthly lease rate of 1.200% of the fair market value of the aircraft in 12 years FMV of Aircraft in 12 years: $20M Life of lease: 8 years Return costs at end of lease: $3M

  Questions

  Please extend your above analysis to 20 years showing the cash flows for the full 20 years ?

  Buy Case

  STL can purchase the same aircraft using a bank loan. The terms of the loan are as follows: Loan to value: 80% Life of Loan: 20 Years Interest Rate: 6.5%

  Depreciation: Straight Line Payment Frequency: Semi-Annual Salvage Value in Year 20: $200K

  Questions

  Please evaluate this financing structure showing all the relevant cashflows ?

• Calculate the NPV of this structure ?

• What should STL do?