# cash flow problem

Bombay airlines leases a fleet of 100 airplanes used to transport freight in western india. bombay structures the terms of all aircraft leases such that the leases are classified as operating leases. annual lease payments for bombays latest airplane acquisition is \$1000. if the company were to capitalize the lease, the reclassification would effectively increase interest expense by \$600 and amortization expense by \$450. the effect of capitalizing the lease on bombays cash flow is: a. a reduction of cash flor from operations b. a reduction of cash flow from financing c. no effect on cash flow d. the effect on CFO would depend on the implied interest rate please explain

B. Capital lease incurs CFF outflow, while CFO outflow is less than operating lease

But the total cash flows are the same?

amberpower Wrote: ------------------------------------------------------- > But the total cash flows are the same? But no such option in answer.

Just checking that CF is different from total cash flow.

from hopetobeat’s answer both A and B are right… so I think going with Amber and C is the right choice. There would be no change in the total Cash Flow, (which is choice C). only a reclassification from CFO to CFF. CP

Capital leases result in higher CFO and lower CFF.

interest rate > depreciation == net cash flow from operations is going to be down. howeve,r you’ll move all the operating lease to CFF, as a result the CFO will up. CFF will go down by 1000. Hence, I’d say B is the answer.

If the question said “No effect on TOTAL cash flow” then it would be correct…absent this I would go for B

cpk123 Wrote: ------------------------------------------------------- > from hopetobeat’s answer both A and B are right… > > > so I think going with Amber and C is the right > choice. There would be no change in the total Cash > Flow, (which is choice C). > > only a reclassification from CFO to CFF. > > CP From my answer, A could never be right. I say CFO outflow in capital lease is less that in operating lease --> CFO in capital leas must be greater than CFO in operating. B must be correct.

is it B, I would go with B