Question
Atleti Azzurri Sightseeing Company (AASC), located in Salerno, owns a large fleet of helicopters for its tourism operation in Salerno area. The company is now
Atleti Azzurri Sightseeing Company (AASC), located in Salerno, owns a large fleet of helicopters for its tourism operation in Salerno area. The company is now considering the purchase of a new helicopter for $320,000 to replace the old one. The company should also pay an additional $30,000 to install an anti-icing system. The firm's old helicopter has a book value of $85,000, but can be sold for $98,000. It is being depreciated at the rate of $13,500 per year for four more years to zero salvage vale under the old depreciation method. The new helicopter will be depreciated using the 5-year MACRS schedule (please use the table below) and it would increase AASCs before-tax revenues by $71,000 per year but would also increase operating costs by $10,000 per year due to the more sophisticated maintenance. The new helicopter will be sold after 6 year for $210,000.
Purchase of the helicopter will require an increase in net operating working capital of $20,000. The net operating working capital will be recovered after the new helicopter is sold.
AASC is in the 34% tax bracket and has overall cost of capital 12 percent.
5-year class
Year | MACRS % |
1 | 20 |
2 | 32 |
3 | 19 |
4 | 12 |
5 | 11 |
6 | 6 |
Show work.
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