American Airlines AAirpass. In 1987 American Airlines sold an unlimited flight pass on Steve Rothstein known as the AAirpass. This would allow him to travel first class to anywhere on any American Airlines flight. The pass also allowed Steve to take a companion along with him and was priced at $383,000. However, the annual average cost to American Airlines for this pass was approximately $1 million annually until 2008 when they canceled it. Assume a cost of capital of 10 percent for American Airlines.

a. What was the actual cost of the pass to American Airlines in 1987 in present value terms?

b. America Airlines tried selling the pass again in 2004 (with some caveats). What should be the price of this pass if the average buyer is expected to live 20 more years and airlines industry faces an inflation of 5 percent and the average cost at the end of 2004 came out to be $1,100,000?