Aerocomp, Inc As she headed toward her bosss office, Emily Hamilton, chief operating officer for the Aerocomp Corporation a computer services firm that specialized in airborne support wished she could remember more of her training in financial theory that she had been exposed to in college Emily had just completed summarizing the financial aspects of four capital investment projects that were open to Aerocomp during the coming year, and she was faced with the task of recommending which should be selected What concerned her was the knowledge that her boss, Kay Marsh, a street smart chief executive, with no background in financial theory, would immediately favor the project that promised the highest gain in reported net income Emily knows that selecting projects purely on that basis would be incorrect but she was not sure of her ability to convince Kay, who tended to assume financiers thought up fancy methods just to show how smart they were As she prepared to enter Kays office, Emily pulled her summary sheets from her briefcase and quickly reviewed the details of the four projects, all of which she considered to be equally risky A proposal to add a jet to the companys fleet The plane was only six years old and was considered a good buy at $300,000 In return, the plane would bring over $600,000 in additional revenue during the next five years with only about $56,000 in operating costs (See Table 1 for details) Table 1 Financial analysis of Project A Add a twin jet to the companys fleet Expenditures Net cost of new plane Additional revenue $300,000 $43,000 $76,800 $112,300 $225,000 $168,750 Additional operating costs 11,250 11,250 11,250 11,250 11,250 Depreciation 45,000 66,000 63,000 63,000 63,000 Net increase in income (13,250) (450) 38,050 150,750 94,500 Less Tax at 33 0 0 12,557 49,748 31,185 Increase in aftertax income ($13,250) ($450) $25,494 $101,003 $63,315 Add back depreciation $45,000 $66,000 $63,000 $63,000 $63,000 Net change in cash flow ($300,000) $31,750 65,550 $88,494 $164,003 $126,315 Use the following template, calculate the operating cash flow and net present value Based on the results of your calculations, would you recommend the project If yes, why Net Present value YEAR 1 YEAR 2 YEAR 3 YEAR 4 YEAR 5 SALES (UNITS) PRICE PER UNIT SALES ($$) VARIABLE COST UNIT VARIABLE COSTS FIXED COSTS DEPRECIATION ( ) EBIT DEPRECIATION ( ) TAXES (ON EBIT) OPERATING CASH FLOW

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Aerocomp, Inc. As she headed toward her bosss office, Emily Hamilton, chief operating officer for the Aerocomp Corporation a computer services firm that specialized in

Aerocomp, Inc.

As she headed toward her bosss office, Emily Hamilton, chief operating officer for the Aerocomp Corporation a computer services firm that specialized in airborne support wished she could remember more of her training in financial theory that she had been exposed to in college. Emily had just completed summarizing the financial aspects of four capital investment projects that were open to Aerocomp during the coming year, and she was faced with the task of recommending which should be selected. What concerned her was the knowledge that her boss, Kay Marsh, a street smart chief executive, with no background in financial theory, would immediately favor the project that promised the highest gain in reported net income. Emily knows that selecting projects purely on that basis would be incorrect; but she was not sure of her ability to convince Kay, who tended to assume financiers thought up fancy methods just to show how smart they were.

As she prepared to enter Kays office, Emily pulled her summary sheets from her briefcase and quickly reviewed the details of the four projects, all of which she considered to be equally risky.

A proposal to add a jet to the companys fleet. The plane was only six years old and was considered a good buy at $300,000. In return, the plane would bring over $600,000 in additional revenue during the next five years with only about $56,000 in operating costs. (See Table 1 for details)

Table 1 Financial analysis of Project A: Add a twin-jet to the companys fleet

	Expenditures
Net cost of new plane Additional revenue	$300,000	$43,000	$76,800	$112,300	$225,000	$168,750
Additional operating costs		11,250	11,250	11,250	11,250	11,250
Depreciation		45,000	66,000	63,000	63,000	63,000
Net increase in income		(13,250)	(450)	38,050	150,750	94,500
Less: Tax at 33%		0	0	12,557	49,748	31,185
Increase in aftertax income		($13,250)	($450)	$25,494	$101,003	$63,315
Add back depreciation		$45,000	$66,000	$63,000	$63,000	$63,000
Net change in cash flow	($300,000)	$31,750	65,550	$88,494	$164,003	$126,315

Use the following template, calculate the operating cash flow and net present value. Based on the results of your calculations, would you recommend the project? If yes, why?

Net Present value	YEAR 1	YEAR 2	YEAR 3	YEAR 4	YEAR 5

SALES (UNITS)
PRICE PER UNIT
SALES ($$)
VARIABLE COST/UNIT
VARIABLE COSTS
FIXED COSTS
DEPRECIATION (-)
EBIT
DEPRECIATION (+)
TAXES (ON EBIT)
OPERATING CASH FLOW