CFA Practice Question

CFA Practice Question

You are thinking of starting a airplane leasing business. A consultant tells you that you can purchase an airplane for $30M and lease it out for $4M a year for the 12 years. (Assume yearly costs for running the business are small enough to be negligible). IRS allows you to straight line depreciate the entire cost of $30M over 12 years for tax purposes (equal depreciation in all years). At the 12th year the book value (for tax purposes) of the airplane will be depreciated down to ZERO. The tax rate is 40% and the discount rate for you for undertaking such a project is 9%.

What will be your yearly Net Income for the first 11 years?
A. $0.8M
B. $0.9M
C. $1.1M
Explanation: Depreciation = Cost / # of years
EBIT = Lease revenues - Depreciation
Taxes = EBIT * Tax Rate
NI = EBIT - Taxes

User Contributed Comments 4

User Comment
chantal Net Income is NEVER before interest, as indicated by the question.
Here we assume the air plane was paid CASH because no info is given.

Cash flow to Firm would be calculated before interest
Bedee Can anyone deliver the calculation?
praj24 Dep = 30/12 = 2.5 x 11 = 27.5
Lease Income = 4 x 11 = 44
44 - 27.5 = 16.5 (1-.04) = 9.9
9.9/11 = 0.9
sunday128 Isn't it as simple as 4M - 2.5M (Dep'n) = 1.5M
1.5M * 0.6 = 0.9M ?
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