Question

1. Wings is a commuter airline that serves the Boston area. Wings plans to lease a new plane through Nantucket Capital Inc. The lease term is 15 years, and no residual value is expected at its end.

a. What monthly lease payment must Nantucket charge to earn a 12% return on its investment if the plane Wings wants costs $1.5 million?

b. What would Nantucket’s return be if it agreed to accept annual payments of $200,000?

c. Suppose Wings and Nantucket agreed to assume a $300,000 residual value for the plane at the end of the lease. How much will Wings have to pay monthly to give Nantucket its 12% return?

Answer 1

a)

=> We can find the monthly lease payment by the formula, , where P is the is the principal, r is the interest rate and n is the number of payments.

=> Here the lease payment is monthly so we have to convert the annual interest rate(12%) into monthly interest rate

* monthly interest rate = 12%/12 = 1%

=> Number of payments = 15*12 = 180

=> Since we have all the values now, plug those values into the formula

*

*

=> Therefore the monthly lease payment is $ 18,002.40

=> We can also find it using the PMT function in excel by giving the values of monthly interest rate, number of payments and principal amount.

b)

=>We can find return % by using same formula we have used above

=> In this case we have yearly payments of 200000, number of payments = 15 and principal = 1500000 and interest rate = ?

=>

=>

=>

=> Solve the equation using trial and error method to get the answer 10% (10.25%).

c)

=> Subtract the residual value of $ 300,000 from the principal $ 1,500,000 to get our new principal that is $ 1,200,000

=> Use the same procedure which we have done in the "a" part ( only replace the principal with 1,200,000)

=>

=> Therefore the monthly payment will $ 14,401.92