Calculate the net advantage to leasing. Assume the airline cannot use any of the tax benefits of ownership and the residual value is (i) the expected residual value, (ii) $50 million, and (-$10 million).

Scenario: An airline was looking to add two additional aircraft to its fleet of over 200 airplanes. The purchase price for each new airplane would be $125 million. Leasing could be an option, however. In this case, a 15-year lease would be quarterly payments of $4 million for each airplane. This payment would be in arrears (like your home mortgage payment). Leasing may be good solution for this airline because of a net operating loss it has experienced. They had $2.5 billion of net operating loss to carry forward. These losses during this time were only allowed to be carried forward for a maximum of 20 years. During the period, the airline's capitalization was (in millions): Long Term Bonds Capitalized leases Total long-term debt Preferred Stock Stockholder's equity Total long-term capitalization Short-term debt Total capitalization $1,352 306 $1,658 283 305 $2.246 221 $2,467 The airline's cost of fully secured 15-year debt was 10% (80% of the value of collateral). It's cost of unsecured 15-year debt was 12% and its WACC was 15%. The airline was uncertain at the time about the residual value of the airplanes at the end of the lease period. They therefore estimated the following possible values and probabilities: Residual value (Smillions): 10 15 20 25 30 Probability (%): 5 10 10 15 20 35 40 45 50 15 10 10 5