Air South, a leading regional airline that is now carrying 54% of all the passengers that pass though the Southeast, is considering adding a new g-range aircraft to its fleet. The aircraft being considered for purchase is the McDonnell Douglas DC-9-532 "Funjet," which is quoted at $60 million unit. McDonnell Douglas requires a 10% down payment at the time of delivery, and the balance is to paid over a 10-year period at an interest rate of compounded annually. The actual payment schedule calls for only interest payments over the year period with the original principal amount to paid off at the end of the 10th year. Air South expect to generate $35 million per year by adding this aft to its current fleet, but it also estimates an ting and maintenance cost of $20 million per .The aircraft is expected to have a 15-year service life with a salvage value of 15% of the original purchase price. If the aircraft is bought, it will be debated by the seven-year MACRS property classifications. The firm's combined federal and state marginal tax rate is 38%, and its required minimum attractive rate of return is 18%.
(a) Use the generalized cash-flow approach to determine the cash flow associated with the debt financing.
(b) Is this project acceptable?