Suppose BMI Regional is considering the purchase of new airplanes to facilitate the operation of new routes. In total, it plans to purchase a new airline fleet for $3.0 million. This fleet will qualify for accelerated depreciation: 20% can be expensed immediately, followed by 32%, 19.2%, 11.52%, 11.52%, and 5.76% over the next five years. However, because of the airlines substantial loss carryforwards, BMI Regional estimates its marginal tax rate to be 10% over the next five years, so it will get a very little tax benefit from the depreciation expenses. Thus, BMI Regional considers leasing airplanes instead. Suppose BMI Regional and the lessor face the same 3.0% borrowing rate, but the lessor has a 40% tax rate. For the purpose of this question, assume the fleet will be worthless after 5 years, the lease term is 5 years, and the lease qualifies as a true tax lease.

1. What is the pre-tax lease rate for which the lessor will break even?
2. What is the free cash flow of the lease for BMI Regional?
3. What is the NPV (lease-buy) for BMI Regional with this lease rate?
4. Should BMI Regional lease or buy?