East-West Airlines Is Planning on Leasing an Aircraft

question 36

Essay

East-West Airlines is planning on leasing an aircraft. East-West does not receive title to the aircraft during or at the end of the lease period. Also, the lease does not contain a bargain purchase option. Using the lease information shown below indicate whether the lease is a capital lease or an operating lease and explain why.
Type of property - Aircraft
Yearly rental - $9,500,000
Lease term - 15 years
Estimated economic life - 25 years
Fair market value of the leased asset - $85,000,000
Present value of lease rental payments - $77,000,000

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Definitions:

Payback Period

The amount of time it takes for an investment to generate enough cash flow to recover its initial cost.

Internal Rate

Typically refers to the Internal Rate of Return (IRR), a financial metric used to estimate the profitability of potential investments.

Payback Period

The length of time it takes for an investment to generate enough cash flow to recover its initial cost.

Salvage Value

The expected remaining valuation of an asset after its service life has ended.