13. Unequal Lives

Shao Airlines is considering the purchase of two alternative planes. Plane A has an expected life of 5 years, will cost $100 million, and will produce net cash flows of $28 million per year. Plane B has a life of 10 years, will cost $132 million, and will produce net cash flows of $27 million per year. Shao plans to serve the route for only 10 years. Inflation in operating costs, airplane costs, and fares are expected to be zero, and the company's cost of capital is 9%. By how much would the value of the company increase if it accepted the better project (plane)? Do not round intermediate calculations. Enter your answer in millions. For example, an answer of $1.234 million should be entered as 1.234, not 1,234,000. Round your answer to three decimal places.

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16. Payback, NPV, and MIRR

Your division is considering two investment projects, each of which requires an up-front expenditure of $26 million. You estimate that the cost of capital is 9% and that the investments will produce the following after-tax cash flows (in millions of dollars):

Year	Project A		Project B
1	5		20
2	10		10
3	15		8
4	20		6

1. What is the regular payback period for each of the projects? Round your answers to two decimal places.

   Project A: years

   Project B: years

2. What is the discounted payback period for each of the projects? Do not round intermediate calculations. Round your answers to two decimal places.

   Project A: years

   Project B: years

3. If the two projects are independent and the cost of capital is 9%, which project or projects should the firm undertake?

   The firm should undertake -Select-Project AProject Bboth projectsItem 5 .

4. If the two projects are mutually exclusive and the cost of capital is 5%, which project should the firm undertake?

   The firm should undertake -Select-Project AProject BItem 6 .

5. If the two projects are mutually exclusive and the cost of capital is 15%, which project should the firm undertake?

   The firm should undertake -Select-Project AProject BItem 7 .

6. What is the crossover rate? Round your answer to two decimal places.

   %

7. If the cost of capital is 9%, what is the modified IRR (MIRR) of each project? Do not round intermediate calculations. Round your answers to two decimal places.

   Project A: %

   Project B: %

$ million

What is the equivalent annual annuity for each plane? Do not round intermediate calculations. Enter your answers in millions. For example, an answer of $1.234 million should be entered as 1.234, not 1,234,000. Round your answers to three decimal places.

Plane A: $ million

Plane B: $ million

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