PacWest Air has decided to acquire a plane to operate on a route for 10 years. The company could buy it for $14 million or lease it from AirCo Leasing. If PacWest buys the plane it will have to pay before-tax maintenance costs of $300,000 annually. The salvage value of the plane after 10 years is expected to be Nil.

If PacWest leases the plane, lease payments are $2.5 million per year over 10 years payable at the beginning of each term. As part of the lease agreement, AirCo Leasing will cover the cost of the maintenance of the plane.

PacWest has a tax rate of 30% and a borrowing rate of 10%. The plane has a CCA rate of 20%.

Enter the values for the Lease Analysis in the boxes below:

1 Discount rate for analysis: Answer %

2

Annual Lease Cash Flows: $ Answer

3 PV of Annual Lease Cash Flows: $ Answer

4

PacWest Air Buy Analysis

Cash flow at T₀ (include the sign if negative): $ Answer

5 Annual Cash Flows for T₁ to T₁₀: $

6 PV of Annual Cash Flows: $

7

PV of CCA Tax Shield: $ Answer

8 NPV Cost of Buying: $

9

Should PacWest Air buy or lease the airplane?

Select one:

a. Lease

b. Buy