1. You work for Air Lease Inc, a wholly owned subsidiary of the Mammoth Aircraft Corporation, which arranges leases of the airplanes that they manufacture. Air Lease pays taxes in the 34% marginal tax bracket, and the firm’s (before-tax) borrowing rate is 5%.
Fly By Night Airlines Inc. has decided to purchase a new M-47 airplane manufactured by Mammoth. They are considering whether to lease or buy, and they have contacted you to see what leasing terms are available. An M-47 costs $11,000,000 and will be depreciated by the straight-line method over eight years (down to a value of zero). The lease will have a life of eight years (after which the craft will be returned to Air Lease).
You know that Fly By Night pays taxes under the Alternative Minimum Tax (AMT) regime, so their marginal tax rate is 20%. You feel that they would probably also borrow at 5% (before-tax) to finance the purchase of the aircraft.
The lease will be structured into eight equal annual lease payments (at the end of each year). You have been assigned to determine an annual lease payment that will make the leasing attractive to both Air Lease and Fly By Night.

2. This version of the leasing problem above focuses specifically on the effect of the structure of depreciation on leasing.
Both Air Lease and Fly By Night pay taxes in the 34% marginal tax bracket. As in the previous problem, the before-tax borrowing cost for both is 5%. The depreciable life of the aircraft and the length of the lease are again both eight years. Fly By Night will depreciate the airplane by an eight-year straight-line schedule. But, Air Lease will depreciate the aircraft by the eight-year Double-Declining-Balance schedule. This means that the depreciation schedule on the $11,000,000 value of the plane will be as follows.

Year                                                                   Depreciation
1                                                                         $2,750,000
2                                                                         $2,062,500
3                                                                         $1,546,875
4                                                                         $1,160,659
5                                                                            $870,117
6                                                                            $870,117
7                                                                            $870,116
8                                                                            $870,116
Again, the lease will be structured into eight equal annual lease payments (at the end of each year). Under these assumptions, find an annual lease payment that will make the leasing attractive to both Air Lease and Fly By Night.

1. You work for Air Lease Inc, a wholly owned subsidiary of the Mam...