Question

_{“Microsoft's Battle for the Air Just Got Easier; Airlines are dumping old planes, giving the e-commerce giant the perfect opportunity to expand its cargo fleet at a time of constrained supply
Wall Street Journal; New York, N.Y.; 01 May 2020.
…Due to Covid-19, airlines are now dumping older planes. According to international advisory firm Ishka, lease rates are down: Renting a Boeing 747-8 freighter is 13% cheaper than in January. Microsoft might even consider using some of its vast cash holdings—$27 billion at the end of March—to start owning its own fleet. The market value of five-year-old 777s and Airbus 330s is down almost 10% this year, Ishka said…”
Earth Airline Ltd (EAL) is evaluating the possibility of tendering for the license to operate international flights from Canberra to Queenstown (NZ) for a 5-year period. If its bid is successful, EAL will have to acquire a new aircraft. Tupoloev Corporation has offered to sell EAL an aircraft at a price of $70 million. It could be depreciated at a rate of 10 per cent per annum, straight-line. The estimated disposal value in 5 years' time is $20 million. Alternatively, EAL can lease the aircraft from Hendrix Leasing. The lease contract calls for five annual lease payments of $15 million, due at the beginning of each year. Additionally, EAL must make a security deposit of $1 million that will be returned when the lease expires. EAL can issue bonds with a yield of 11 per cent per annum and the company income tax rate is 30%.
Required:
Considering both financial and non-financial aspects, advise with reasonings if EAL should purchase or lease the aircraft given the current market conditions. Show all workings where calculations are required.}

Answer 1