Magna Charter has been asked to operate a Beaver bush plane for a mining company exploring north and west of Fort Liard. Magna will have a firm one-year contract with the mining company and expects that the contract will be renewed for the five-year duration of the exploration program. If the mining company renews at year 1, it will commit to use the plane for four more years. Magna Charter has the following choices: a. Buy the plane for $500,000.
b. Take a one-year operating lease for the plane.
c. The lease rate is $118,000, paid in advance.
d Arrange a five-year, noncancelable financial lease at a rate of $75,000 per year, paid in advance.

Lease payments will be of equal amounts each year, and due in advance at the beginning of each year. The plane falls in the 5-year class with respect to depreciation under the MACRS. Accordingly, the depreciation percentages are 20%, 32%, 19%, 12%, 11% and 6% respectively. The salvage value at the end of 7 years is estimated at $50,000. Magna’s pre-tax cost of debt is 10%. Magna has large tax-loss carry forwards; however, owing to AMT (Alternative Minimum Tax) provisions, its expected marginal tax rate is 20%. Stellar Leasing Co., on the other hand , is a highly profitable company and faces a marginal tax rate of 40%. Stellar can earn a pre-tax rate of return of 10% on investments of similar risk.

Requried:
a. Evaluate the lease from the point of view of both Magna and Stellar assuming that the lease payment is $180,500.
b. What is the range of lease payment that would acceptable from the Lessee and the Lessor’s view point?