Question
1. Southwest Airlines is considering buying a new Boeing 737. The airplane will cost 25 million dollars today and then generate 9 million dollars per
1. Southwest Airlines is considering buying a new Boeing 737. The airplane will cost 25 million dollars today and then generate 9 million dollars per year for the next 10 years. After 10 years, the airplane will not generate any cash for Southwest Airlines. If the cost of capital is 9%, what is the NPV (in millions of dollars) of buying the new airplane? (Enter your answer in millions. i.e. 5.5 million, not 5,500,000)
2. PayPal is considering an update to its app. The update would cost 10 million dollars today, and 6 million dollars 1 year from now. In years 2-6, the update would increase PayPal's cash flows by 8 million dollars. What is the IRR of this project?
3.
Oaken Music wants to launch a new record label. The payback period for the new record label would be 1.7 years and the NPV would be $450,000. Oaken Music has a required payback period of 2.5 years. Select the answer that explains what Oaken Music should do and why:
Start the new record label because the NPV is positive | ||
Start the new record label because the payback period is short | ||
Do not start the new record label because the NPV is positive | ||
Do not start the new record label because the payback period is too long | ||
Not enough information to decide |
4, Verizon is thinking about building a new set of cell towers. The cost of building these towers today would be 195 million dollars. The new towers would then increase future cash flows by 38 million dollars in year 1, 60 million dollars in year 2, 97 million dollars in year 3, and 112 million dollars in year 4. Suppose the cost of capital is 13%. What is the profitability index of this project?
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