Upload
truly
View
42
Download
0
Tags:
Embed Size (px)
DESCRIPTION
Will leasing fly at Continental?. Sara Crider, Drew Siebert, Jason Stone, & Darin Wolding. Continental Airlines History. Founded in 1934 as Varney Speed lines Renamed to Continental in 1937 Acquired by Texas Air Corp. in 1981 Merged with Texas International in 1982 - PowerPoint PPT Presentation
Citation preview
WILL LEASING FLY AT CONTINENTAL?Sara Crider, Drew Siebert, Jason
Stone, & Darin Wolding
Continental Airlines History
Founded in 1934 as Varney Speed lines Renamed to Continental in 1937 Acquired by Texas Air Corp. in 1981 Merged with Texas International in 1982 Chapter 11 Bankruptcy in 1983 Merged with People Express, Frontier, and
New York Air in 1987 Chapter 11 Bankruptcy in 1990 Merged with United Airlines in 2010
Continental Airlines Currently operating independent from
United Headquarters in Chicago, IL 2400 Departures Daily 130 Domestic Destinations 132 International Destinations Fleet of 348 airplanes
Statement of the Problem
POTENTIAL OPTIONS FOR MANAGEMENT REVIEW
NET ADVANTAGE TO LEASING
Many variables must be considered in rent vs. buy decisions: Tax deductions and tax credits of
ownership Cash flow considerations Depreciation tax credits (opportunity
cost to lessee) Time Value of Money: Initial Cash
Outlay Avoided Continental must assess their tax
position. Can Continental take advantage of
tax credits? If so, buying may be a better option than leasing.
Continental must reconcile the opportunity cost of capital used to purchase new planes. What does Continental earn on
invested money? Is the Return On Investment higher if
Continental buys the aircraft versus investing the initial cash outlay saved in securities?
The Net Advantage to Leasing (NAL) method considers all variables relevant to the rent vs. buy decision.
Continental must consider the residual value of the assets in their decision. Residual value is an opportunity
cost to the lessee The lessee forgoes the benefit of
liquidating the asset at the end of the lease period.
High residual values may negate the Time Value of Money benefit associated with avoiding high initial cash outlay.
Continental Airlines must determine the most cost effective way to add two Boeing 757 aircraft to its fleet for the next fifteen (15) years.
$0 $20,000,000 $40,000,000 $60,000,000 $80,000,000
($4,000,000)
($3,000,000)
($2,000,000)
($1,000,000)
$0
$1,000,000
$2,000,000
$3,000,000
$4,000,000
Impact of Residual Values on Net Advantage to Leasing
NAL
Residual Values
Net
Adv
anta
ge t
o Le
asin
gResidual Value NAL
$5,000,000.00 $3,584,276.00$10,000,000.00 $3,035,135.24$15,000,000.00 $2,485,994.47$20,000,000.00 $1,936,853.71$25,000,000.00 $1,387,712.95$30,000,000.00 $838,572.19$35,000,000.00 $289,431.43$40,000,000.00 ($259,709.33)$45,000,000.00 ($808,850.09)$50,000,000.00 ($1,357,990.85)$55,000,000.00 ($1,907,131.61)$60,000,000.00 ($2,456,272.37)$65,000,000.00 ($3,005,413.14)$70,000,000.00 ($3,554,553.90)
0 2 4 6 8 10 12 14 16
($375)($355)($335)($315)($295)($275)($255)($235)($215)($195)($175)($155)($135)($115)($95)($75)($55)($35)($15)
$5
($339)
($155)
($94)
($63)($45)
($32)($23)($17)($12)($8)($4)($2)$0 $2 $4
Effect of Years Without Tax Deductions on NAL (in Mil-lions)
Years With No Taxes
Net
Adv
anta
ge o
f Le
asin
g Years Without Taxes NAL
14 ($339,772,549.32)13 ($155,569,263.81)12 ($94,168,168.64)11 ($63,467,621.05)10 ($45,047,292.50)9 ($32,767,073.47)8 ($23,995,488.44)7 ($17,416,799.67)6 ($12,300,041.74)5 ($8,206,635.40)4 ($4,857,484.75)3 ($2,066,525.88)2 $295,054.701 $2,319,266.630 $4,073,583.63
1. Calculate the net advantage to leasing. Use the expected residual value and assume Continental can use all the tax benefits of ownership. It’s tax rate is 40%. Assume straight-line depreciation to the expected residual value.
Probability Value
0.05 $ 10,000,000.00 $ 500,000.00
0.1 $ 15,000,000.00 $ 1,500,000.00 0.1 $ 20,000,000.00 $ 2,000,000.00
0.15 $ 25,000,000.00 $ 3,750,000.00 0.2 $ 30,000,000.00 $ 6,000,000.00
0.15 $ 35,000,000.00 $ 5,250,000.00 0.1 $ 40,000,000.00 $ 4,000,000.00 0.1 $ 45,000,000.00 $ 4,500,000.00
0.05 $ 50,000,000.00 $ 2,500,000.00 1 $ 30,000,000.00 Expected Residual Value
Probability Rate 0.8 10% 0.08 0.2 12% 0.024 1 10.4%Total Interest Cost ( r)
(1-T) 0.6
r 0.104
Quarterly r 0.026
Question 1 cont……
Quarterly A/P Cost $ 4,000,000.00
Tax Rate (T) 0.4
Tax deduction $ 1,600,000.00
Airplane Cost (A/P Cost) $ 125,000,000.00
Expected Residual Value (ERV) $ 30,000,000
Tax Rate (T) 0.4Years 15Quarters per year 4Number of Periods 60
Depreciation Tax Credits $ 633,333.333
Quarterly CFAT $ 3,033,333.333
A/P Cost @ M79 ITC NAL
NAL = 125000000 117631571.80 3294844.57 $ 4,073,583.63
Cont….
Quarterly Period CFAT [1 + (1-T)r}^t]
1 $ 3,033,333.33 1.0156 $ 2,986,740.19 2 $ 3,033,333.33 1.03144336 $ 2,940,862.73 3 $ 3,033,333.33 1.04753388 $ 2,895,689.96 4 $ 3,033,333.33 1.0638754 $ 2,851,211.07 5 $ 3,033,333.33 1.08047186 $ 2,807,415.39 6 $ 3,033,333.33 1.09732722 $ 2,764,292.43 7 $ 3,033,333.33 1.11444553 $ 2,721,831.85 8 $ 3,033,333.33 1.13183088 $ 2,680,023.49 9 $ 3,033,333.33 1.14948744 $ 2,638,857.31
10 $ 3,033,333.33 1.16741944 $ 2,598,323.47 11 $ 3,033,333.33 1.18563119 $ 2,558,412.24 12 $ 3,033,333.33 1.20412703 $ 2,519,114.06 13 $ 3,033,333.33 1.22291141 $ 2,480,419.51 14 $ 3,033,333.33 1.24198883 $ 2,442,319.33 15 $ 3,033,333.33 1.26136386 $ 2,404,804.38 16 $ 3,033,333.33 1.28104113 $ 2,367,865.68 17 $ 3,033,333.33 1.30102538 $ 2,331,494.37 18 $ 3,033,333.33 1.32132137 $ 2,295,681.73 19 $ 3,033,333.33 1.34193399 $ 2,260,419.19 20 $ 3,033,333.33 1.36286816 $ 2,225,698.30 21 $ 3,033,333.33 1.3841289 $ 2,191,510.73 22 $ 3,033,333.33 1.40572131 $ 2,157,848.30 23 $ 3,033,333.33 1.42765056 $ 2,124,702.93 24 $ 3,033,333.33 1.44992191 $ 2,092,066.69 25 $ 3,033,333.33 1.47254069 $ 2,059,931.76 26 $ 3,033,333.33 1.49551233 $ 2,028,290.42 27 $ 3,033,333.33 1.51884232 $ 1,997,135.12 28 $ 3,033,333.33 1.54253626 $ 1,966,458.37 29 $ 3,033,333.33 1.56659983 $ 1,936,252.82 30 $ 3,033,333.33 1.59103878 $ 1,906,511.25
31 $ 3,033,333.33 1.61585899 $ 1,877,226.51 32 $ 3,033,333.33 1.64106639 $ 1,848,391.60 33 $ 3,033,333.33 1.66666702 $ 1,819,999.61 34 $ 3,033,333.33 1.69266703 $ 1,792,043.73 35 $ 3,033,333.33 1.71907263 $ 1,764,517.26 36 $ 3,033,333.33 1.74589017 $ 1,737,413.61 37 $ 3,033,333.33 1.77312605 $ 1,710,726.28 38 $ 3,033,333.33 1.80078682 $ 1,684,448.87 39 $ 3,033,333.33 1.8288791 $ 1,658,575.10 40 $ 3,033,333.33 1.85740961 $ 1,633,098.76 41 $ 3,033,333.33 1.8863852 $ 1,608,013.75 42 $ 3,033,333.33 1.91581281 $ 1,583,314.05 43 $ 3,033,333.33 1.94569949 $ 1,558,993.75 44 $ 3,033,333.33 1.9760524 $ 1,535,047.01 45 $ 3,033,333.33 2.00687882 $ 1,511,468.11 46 $ 3,033,333.33 2.03818613 $ 1,488,251.39 47 $ 3,033,333.33 2.06998183 $ 1,465,391.28 48 $ 3,033,333.33 2.10227355 $ 1,442,882.32 49 $ 3,033,333.33 2.13506901 $ 1,420,719.10 50 $ 3,033,333.33 2.16837609 $ 1,398,896.32 51 $ 3,033,333.33 2.20220276 $ 1,377,408.74 52 $ 3,033,333.33 2.23655712 $ 1,356,251.22 53 $ 3,033,333.33 2.27144741 $ 1,335,418.69 54 $ 3,033,333.33 2.30688199 $ 1,314,906.16 55 $ 3,033,333.33 2.34286935 $ 1,294,708.70 56 $ 3,033,333.33 2.37941811 $ 1,274,821.49 57 $ 3,033,333.33 2.41653704 $ 1,255,239.75 58 $ 3,033,333.33 2.45423501 $ 1,235,958.79 59 $ 3,033,333.33 2.49252108 $ 1,216,973.99 60 $ 3,033,333.33 2.53140441 $ 1,198,280.81
$ 117,631,571.80
2. Calculate the net advantage to leasing. Assume Continental cannot use any of the tax benefits of ownership and the residual value is (i) the expected residual value, (ii) $50 million, and (iii) $10 million.
Probability Rate 0.8 10% 0.08 0.2 12% 0.024 1 10.4%Total Interest Cost ( r)
2.6%Quarterly r
Airplane Cost (A/P Cost) $ 125,000,000.00
Probability Value0.05 10,000,000.00$ 500,000.00$ 0.1 15,000,000.00$ 1,500,000.00$ 0.1 20,000,000.00$ 2,000,000.00$
0.15 25,000,000.00$ 3,750,000.00$ 0.2 30,000,000.00$ 6,000,000.00$
0.15 35,000,000.00$ 5,250,000.00$ 0.1 40,000,000.00$ 4,000,000.00$ 0.1 45,000,000.00$ 4,500,000.00$
0.05 50,000,000.00$ 2,500,000.00$ 1 30,000,000.00$ Expected Residual Value
Copy Formulae down from Row 15Numerator DenominatorQuarterly CFAT
Period (1 + Quarterly r)^period N/D1 2,400,000.00$ 1.026000 2,339,181.29$ 2 2,400,000.00$ 1.052676 2,279,903.79$ 3 2,400,000.00$ 1.080046 2,222,128.45$ 4 2,400,000.00$ 1.108127 2,165,817.20$ 5 2,400,000.00$ 1.136938 2,110,932.94$ 6 2,400,000.00$ 1.166498 2,057,439.52$ 7 2,400,000.00$ 1.196827 2,005,301.67$ 8 2,400,000.00$ 1.227945 1,954,485.06$ 9 2,400,000.00$ 1.259871 1,904,956.20$
10 2,400,000.00$ 1.292628 1,856,682.46$ 11 2,400,000.00$ 1.326236 1,809,632.02$ 12 2,400,000.00$ 1.360719 1,763,773.90$ 13 2,400,000.00$ 1.396097 1,719,077.88$ 14 2,400,000.00$ 1.432396 1,675,514.50$ 15 2,400,000.00$ 1.469638 1,633,055.07$ 16 2,400,000.00$ 1.507849 1,591,671.61$ 17 2,400,000.00$ 1.547053 1,551,336.85$ 18 2,400,000.00$ 1.587276 1,512,024.22$ 19 2,400,000.00$ 1.628545 1,473,707.82$ 20 2,400,000.00$ 1.670888 1,436,362.39$ 21 2,400,000.00$ 1.714331 1,399,963.35$ 22 2,400,000.00$ 1.758903 1,364,486.69$ 23 2,400,000.00$ 1.804635 1,329,909.06$ 24 2,400,000.00$ 1.851555 1,296,207.66$ 25 2,400,000.00$ 1.899696 1,263,360.29$ 26 2,400,000.00$ 1.949088 1,231,345.31$ 27 2,400,000.00$ 1.999764 1,200,141.63$ 28 2,400,000.00$ 2.051758 1,169,728.68$ 29 2,400,000.00$ 2.105104 1,140,086.44$ 30 2,400,000.00$ 2.159836 1,111,195.36$
31 2,400,000.00$ 2.215992 1,083,036.41$ 32 2,400,000.00$ 2.273608 1,055,591.04$ 33 2,400,000.00$ 2.332722 1,028,841.17$ 34 2,400,000.00$ 2.393372 1,002,769.18$ 35 2,400,000.00$ 2.455600 977,357.87$ 36 2,400,000.00$ 2.519446 952,590.52$ 37 2,400,000.00$ 2.584951 928,450.80$ 38 2,400,000.00$ 2.652160 904,922.80$ 39 2,400,000.00$ 2.721116 881,991.04$ 40 2,400,000.00$ 2.791865 859,640.39$ 41 2,400,000.00$ 2.864454 837,856.13$ 42 2,400,000.00$ 2.938929 816,623.91$ 43 2,400,000.00$ 3.015342 795,929.73$ 44 2,400,000.00$ 3.093740 775,759.97$ 45 2,400,000.00$ 3.174178 756,101.34$ 46 2,400,000.00$ 3.256706 736,940.88$ 47 2,400,000.00$ 3.341381 718,265.96$ 48 2,400,000.00$ 3.428257 700,064.29$ 49 2,400,000.00$ 3.517391 682,323.87$ 50 2,400,000.00$ 3.608843 665,033.01$ 51 2,400,000.00$ 3.702673 648,180.32$ 52 2,400,000.00$ 3.798943 631,754.70$ 53 2,400,000.00$ 3.897715 615,745.32$ 54 2,400,000.00$ 3.999056 600,141.64$ 55 2,400,000.00$ 4.103031 584,933.37$ 56 2,400,000.00$ 4.209710 570,110.50$ 57 2,400,000.00$ 4.319163 555,663.25$ 58 2,400,000.00$ 4.431461 541,582.12$ 59 2,400,000.00$ 4.546679 527,857.82$ 60 2,400,000.00$ 4.664893 514,481.30$
72,519,949.95$
Given in Case Study (Same as Question 1)Probability Value
0.05 10,000,000.00$ 500,000.00$ 0.1 15,000,000.00$ 1,500,000.00$ 0.1 20,000,000.00$ 2,000,000.00$
0.15 25,000,000.00$ 3,750,000.00$ 0.2 30,000,000.00$ 6,000,000.00$
0.15 35,000,000.00$ 5,250,000.00$ 0.1 40,000,000.00$ 4,000,000.00$ 0.1 45,000,000.00$ 4,500,000.00$
0.05 50,000,000.00$ 2,500,000.00$ 1 30,000,000.00$ Expected Residual Value
(1+ 0.15/4)^number of periodsExpected Residual Value 30,000,000.00$ 9.105133609
50,000,000.00$ 9.105133609
10,000,000.00$ 9.105133609
ITC A/P Cost @ G74 ITC NAL3,294,844.57$ NAL = 125,000,000.00$ 72,519,949.95$ 3,294,844.57$ 49,185,205.49$
5,491,407.61$ NAL = 125,000,000.00$ 72,519,949.95$ 5,491,407.61$ 46,988,642.44$
1,098,281.52$ NAL = 125,000,000.00$ 72,519,949.95$ 1,098,281.52$ 51,381,768.53$
3. Determine the residual value that would make the net advantage to leasing equal zero, assuming Continental cannot use any of the tax benefits of ownership.
Airplane Cost (A/P Cost) 125,000,000.00$ Given in Case Study
Given in Case Study (Same as Question 1)Probability Rate
0.8 10% 0.080.2 12% 0.0241 10.4% Total Interest Cost ( r)
2.6% Quarterly r
INPUT VALUE @ K16 for SAL@F75 SAL GET M16 to EQUAL ZERO (rounding to 0.00)
125,000,000.00$ 72,519,949.95$ 477,837,867.00$ NAL=0 0.069.105133609
Quarterly CFATPeriod (1 + Quarterly r)^period N/D
1 2,400,000.00$ 1.026000 2,339,181.29$ 2 2,400,000.00$ 1.052676 2,279,903.79$ 3 2,400,000.00$ 1.080046 2,222,128.45$ 4 2,400,000.00$ 1.108127 2,165,817.20$ 5 2,400,000.00$ 1.136938 2,110,932.94$ 6 2,400,000.00$ 1.166498 2,057,439.52$ 7 2,400,000.00$ 1.196827 2,005,301.67$ 8 2,400,000.00$ 1.227945 1,954,485.06$ 9 2,400,000.00$ 1.259871 1,904,956.20$
10 2,400,000.00$ 1.292628 1,856,682.46$ 11 2,400,000.00$ 1.326236 1,809,632.02$ 12 2,400,000.00$ 1.360719 1,763,773.90$ 13 2,400,000.00$ 1.396097 1,719,077.88$ 14 2,400,000.00$ 1.432396 1,675,514.50$ 15 2,400,000.00$ 1.469638 1,633,055.07$ 16 2,400,000.00$ 1.507849 1,591,671.61$ 17 2,400,000.00$ 1.547053 1,551,336.85$ 18 2,400,000.00$ 1.587276 1,512,024.22$ 19 2,400,000.00$ 1.628545 1,473,707.82$ 20 2,400,000.00$ 1.670888 1,436,362.39$ 21 2,400,000.00$ 1.714331 1,399,963.35$ 22 2,400,000.00$ 1.758903 1,364,486.69$ 23 2,400,000.00$ 1.804635 1,329,909.06$ 24 2,400,000.00$ 1.851555 1,296,207.66$ 25 2,400,000.00$ 1.899696 1,263,360.29$ 26 2,400,000.00$ 1.949088 1,231,345.31$ 27 2,400,000.00$ 1.999764 1,200,141.63$ 28 2,400,000.00$ 2.051758 1,169,728.68$ 29 2,400,000.00$ 2.105104 1,140,086.44$ 30 2,400,000.00$ 2.159836 1,111,195.36$
31 2,400,000.00$ 2.215992 1,083,036.41$ 32 2,400,000.00$ 2.273608 1,055,591.04$ 33 2,400,000.00$ 2.332722 1,028,841.17$ 34 2,400,000.00$ 2.393372 1,002,769.18$ 35 2,400,000.00$ 2.455600 977,357.87$ 36 2,400,000.00$ 2.519446 952,590.52$ 37 2,400,000.00$ 2.584951 928,450.80$ 38 2,400,000.00$ 2.652160 904,922.80$ 39 2,400,000.00$ 2.721116 881,991.04$ 40 2,400,000.00$ 2.791865 859,640.39$ 41 2,400,000.00$ 2.864454 837,856.13$ 42 2,400,000.00$ 2.938929 816,623.91$ 43 2,400,000.00$ 3.015342 795,929.73$ 44 2,400,000.00$ 3.093740 775,759.97$ 45 2,400,000.00$ 3.174178 756,101.34$ 46 2,400,000.00$ 3.256706 736,940.88$ 47 2,400,000.00$ 3.341381 718,265.96$ 48 2,400,000.00$ 3.428257 700,064.29$ 49 2,400,000.00$ 3.517391 682,323.87$ 50 2,400,000.00$ 3.608843 665,033.01$ 51 2,400,000.00$ 3.702673 648,180.32$ 52 2,400,000.00$ 3.798943 631,754.70$ 53 2,400,000.00$ 3.897715 615,745.32$ 54 2,400,000.00$ 3.999056 600,141.64$ 55 2,400,000.00$ 4.103031 584,933.37$ 56 2,400,000.00$ 4.209710 570,110.50$ 57 2,400,000.00$ 4.319163 555,663.25$ 58 2,400,000.00$ 4.431461 541,582.12$ 59 2,400,000.00$ 4.546679 527,857.82$ 60 2,400,000.00$ 4.664893 514,481.30$
72,519,949.95$
4. Suppose Continental believes it will not be in a taxpaying position for a decade or longer.
Should it lease, or borrow and buy? Explain.Salvage Value NAL (1 Plane)$30M $839k$50M ($1,358k)$10M $3,035k
The worst case scenario is for Continental to not be able to use tax benefits for the full 15 year lease. In that situation, leasing is still a positive NPV option at the expected residual value of $30M per plane. For this reason, Continental should lease.
5.Suppose Continental believes it will not be in a taxpaying position for a decade or longer, and this lease includes the option
to terminate the lease at any time without penalty. Should it lease, or borrow and buy? Explain.
Evaluating the value of an early termination option on the NAL is difficult because the salvage value of the asset will be different at any possible termination point. Because the NAL is positive for the expected salvage value over 15 years, it is still a good idea to lease because “options” cannot have a negative value. The best value of this option is that it gives Continental flexibility which is valuable to any business. With the ability to break the lease without penalty at any time, Continental can adjust to market conditions like fewer people flying or newer more fuel efficient aircraft.