Bailey Airline Company is considering expanding its territory. The company has the opportunity to purchase one of

Question:

Bailey Airline Company is considering expanding its territory. The company has the opportunity to purchase one of two different used airplanes. The first airplane is expected to cost $9,000,000; it will enable the company to increase its annual cash inflow by $3,000,000 per year. The plane is expected to have a useful life of five years and no . The second plane costs $18,000,000; it will enable the company to increase annual cash flow by $4,500,000 per year. This plane has an eight-year useful life and a zero .

Required
a. Determine the for each investment alternative and identify the alternative Bailey should accept if the decision is based on the payback approach.
b. Discuss the shortcomings of using the payback method to evaluate investment opportunities.

Salvage Value
Salvage value is the estimated book value of an asset after depreciation is complete, based on what a company expects to receive in exchange for the asset at the end of its useful life. As such, an asset’s estimated salvage value is an important... Payback Period
Payback period method is a traditional method/ approach of capital budgeting. It is the simple and widely used quantitative method of Investment evaluation. Payback period is typically used to evaluate projects or investments before undergoing them,...