(25 points)

2. Mays Airlines is considering purchasing one of two alternative airplanes. Airplane A has an expected operating life of 5 years, will cost $200 million, and will produce net after-taxes cash inflows of $60 million per year. Airplane B has an operating life of 10 years, will cost $264 million and will produce net cash inflows after taxes of $50 million per year. Mays plans to serve the route for at least 10 years. Inflation in operating costs, airplane costs and fares are expected to be zero, and the companys cost of capital is 12%. By how much would the value of Mays stock increase (NPV of adopted Project) if it accepts the better project?

Hint:

Use Replacement Chains for Project A

0 1 2 3 4 5 6 7 8 9 10

A CFs -200 60 60 60 60 60

-200 60 60 60 60 60

B CFs -264 50 50 50 50 50 50 50 50 50 50

NPV_A =

NPV_B =

Choose A