A leading regional airline that is now carrying 54% of all the passengers that pass through the Southeast is considering the possibility of adding a new long‐range aircraft to its fleet. The aircraft being considered for purchase is the Boeing 717‐200, which is quoted at $35 million per unit. Boeing requires a 10% down payment at the time of delivery, and the balance is to be paid over a 10‐year period at an interest rate of 9% compounded annually. The actual payment schedule calls for making only interest payments over the 10‐year period, with the original principal amount to be paid off at the end of the 10th year. The airline expects to generate $40 million per year by adding this aircraft to its current fleet but also estimates an operating and maintenance cost of $30 million per year. The aircraft is expected to have a 15‐year service life with a salvage value of 15% of the original purchase price. If the airline purchases the aircraft, it will be depreciated by the seven‐year MACRS property classification. The firm’s combined federal and state marginal tax rate is 38%, and its MARR is 18%.
(a) Determine the cash flow associated with the debt financing.
(b) Is this project acceptable?