Western Airfines is considering a new route that will require adding an additional Boeing 777 to its fleet. Western can purchase the airplane for $224.3 million or lease it for $25.0 million per year. If it purchases the airplane, its seating can be optimized, and the new route is expected to generate profits of $49.2 milion per year, if leased. the route will only generate profits of $36.6 million per year. Suppose tho appropriate cost of capital is 12.1% and that, if purchased, the plane can be sold at any time for an expected resale price of $224,3 milion. Ignore taxes, a. As a one-year decision, does purchasing or leasing the plane havo higher NPV? b. Suppose the funds to purchase or lease the plane will come from equity holders (for example, by reducing the amount of Westem's current dividend) Wostem also has one-year debt outstanding, and there is a 10.8% (risk-neutral) probability that over the noxt year Western will declare barkruptcy and its equity holders will be wiped out. Otherwise, the debt will be rolled over at the end of the year. Is purchasing or leasing the plane more attractive to equity hoiders? c. At what (risk-neutral) probability of default would equity holders' preference for leasing versus purchasing the plane change? a. As a one-year decision, does purchasing of leasing the plane have higher NPV? The NPV of parchasing is $ million. (Round to two docimal places.) The NPV of leasing is $ mallion. (Round to two decimal places.) (Select from the drop-down menu) for $25.0 million per year. If it purchases the that will require adding an additional Boeing 777 to its fleet. Westem can purchase the airplane for \$224.3 milion or the route will only generate profits of 536.6 million per year. Suppose the appropriate cost of captal is 12.15 and to generate profits of S49. million per year if for an expected resale price of $224.3 million. Ignore taxes. a. As a one-year decision, does purchasing or leasing the plane have higher NPV? b. Suppose the funds to purchase or lease the plane will come from equity holders (for example, by foducing the amount of Westem's current dividend). Westem has one-year debt outstanding, and there is a 10.8% (risk-neutral) probability that over the next year Western will declare bankrupticy and its equity hoiders wili be Wiped out. Otherwise, the debt will be rolled over at the end of the year. Is purchasing or leasing the plane more attractive to equaty holders? c. At what (risk-neutral) probability of default would equity holders' preference for leasing versus purchasing the plane change? As a one-year decision the NPV of the plane is highor. b. Suppose the funds to purchase or lease the plane will come from equity holdors (for example, by reducing the aimount of Westam's current dividend) Wastern also has one-year debt outstanding; and there is a 10.8% (risk-neutral) probability that over the next year Wostem will declare bankruptcy and ts equity holders will be wiped out. Otherwise, the debt will be rolled over at the end of the year. Is purchasing of leasing the plane more atiractivin to ecuity holderin? The NPV of purchasing is 3 million. (Round to two decimal places.) Westem Airlines is considering a new route that will require adding an additional Boeing 777 to its feet. Western can purchase the airpiane for 52243 millon or lease il for $25.0 million per yoar, If it purchases the airplane, its seating can be optimized, and the new roufe is expected to generale profits of $492 milion per year if leased. the route will only generate profits of $36.6 million per year, Suppose the appropriate cost of capital is 12.15 and that, if purchased, the plane can be soid at any lime for an expected resale price of $224.3 million. Ignore taxes. a. As a one-year decision, does purchasing or leasing the plane have higher NPY? b. Suppose the funds to purchase or lease the plane will come from equity holders (for example, by reducing the amount of Westernia cirrent cividend) Westem atso has one-year debt outstanding, and there is a 10.8% (risk-neutral) probability that over the next year Western will declare banknuptcy and its oquity holders will be Wiped out. Otherwise, the debt will be rolled over at the end of the year. Is purchasing or leasing the plane more attractive to equity holders? c. At what (risk-noutral) probability of default would equity holders' preference for leasing versus purchasing the plane change? The NPV of purchasing is $ million. (Round to two decimal places.) The NPV of leasing is million. (Round to fwo decimal places.) c. At what (isk-noutral) probability of default would equity holders' preference for leasing vernus purchasing the plane change? The risk-neutral probability is \%. (Round to two decimal places)
