All amounts in $ millions.

An airline is considering selling an old aircraft and replacing it with a new aircraft. The new aircraft costs $60 with a useful life of 20 years and will have no salvage value. The old aircraft has a remaining life of 20 years and final salvage value of $3.

Journal Entry if old aircraft is retired:

Accumulated Depreciation 59

Old Aircraft 70

Cash 16

Gain on Sale 5

The Controller recommends purchasing the new aircraft because it will generate $30.34 in savings this year ($2 operating saving + $0.34 reduced depreciation + $13 increase in cash + $5 increase in gain + $10 lower purchase price = $30.34)

• the new aircraft will save $2 per year in operating costs compared to the old aircraft.
• Both aircraft are depreciated using the decline-balance method, but the new aircraft will be have a much lower rate of 2% compared to 14% for the old aircraft, and will result in a reduction in deprecation costs this year of $0.34 [ (70 - 59) x 14% - 60 x 2%] = 0.34
• If the airline immediately sells the old aircraft, it will generate $16 in cash, which is $13 more than if they keep the old aircraft for the rest of its life.
• If the airline immediately sells the old aircraft, it will generate a gain of $5. If they keep the old aircraft for the rest of its life, it will not generate any gain on disposal.
• The new aircraft costs $10 less than the old aircraft.

Total savings this year will be $30.34 ($2 operating saving + $0.34 reduced depreciation + $13 increase in cash + $5 increase in gain + $10 lower purchase price = $30.34)

Required: Should they acquire the new aircraft? Make a recommendation and base your response on bothquantitative andqualitative factors. (Quantitative means recalculate everything based on relevant costs, and Qualitative means discuss other business/strategic issues that are important but can not be quantified).