Question 1

Wakanda Airlines Limited is contemplating leasing an aircraft costing $90 million. The aircraft has a useful life of 10 years and is depreciated using the straight-line method over its useful life, with no scrap value at the end. Further, annual lease payment is $12 million per annum, paid at the end of each year for the next 15 years. Wakanda Airlines Limited can borrow at an interest rate of 10% before tax; while it enjoys a tax rate of 40%. Required:

(i) Using appropriate computation, what is the Net Advantage of Leasing to Wakanda Airlines Limited should buy or lease the aircraft.

(ii) Should Wakanda Airlines Limited buy or lease the asset if the tax rate is reduced to 20%?