Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

A private jet charter firm in Champaign is considering adding a new jet to their fleet. For a simple NPV analysis they have made the

A private jet charter firm in Champaign is considering adding a new jet to their fleet. For a simple NPV analysis they have made the following assumptions: The cost of the new Global 5000 jet would be $50m. The lifetime is 25 years with depreciation done on a straight-line basis. The appropriate discount rate for projects is 15%. The corporate tax rate is 21%. The rental revenue for year 1 is $15,000/hour (including the cost of fuel, taxes, airport fees etc.) and this would increase annually at the rate of inflation (assume this to be 2.5% over the next twenty five years). i.e. rental revenue in year 5 would be ($15,000 ×(1+0.025)4)/hour Fixed costs of owning the jet (maintenance, airport fees, insurance, marketing etc.) are around $1m/year for year 1. You may assume that these costs also increase annually at the same rate of inflation. The costs of operating are $5,000/hour when the jet is in use in year 1. You may assume that these costs also increase annually at the rate of inflation. The charter firm believe that there is reasonable demand for this jet and estimate that it would be used around 500 hours per year in year 1, increasing to 750 hours per year in year 2, 1000 hours per year in year 3 and staying at that level until 25 years.


Calculate the net present value of the investment in the new jet. 

Based on your answer to  above part, please advise as to whether they should invest in the new jet 

Step by Step Solution

3.45 Rating (158 Votes )

There are 3 Steps involved in it

Step: 1

The net present value of the investment in the new jet is 543478387 Based on the ... blur-text-image

Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image

Step: 3

blur-text-image

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

Foundations of Financial Management

Authors: Stanley Block, Geoffrey Hirt, Bartley Danielsen, Doug Short, Michael Perretta

10th Canadian edition

1259261018, 1259261015, 978-1259024979

More Books

Students also viewed these Finance questions