Question
Blackbank, Inc. is considering two alternative planes. Plane A has an expected life of 5 years, will cost $150 million, and will produce net cash
Blackbank, Inc. is considering two alternative planes. Plane A has an expected life of 5 years, will cost $150 million, and will produce net cash flows of $40 million per year. Plane B has a life of 10 years, will cost $123 million, and will produce net cash flows of $28 million per year. Nighthawk, Inc. plans to serve the route for only 10 years. Inflation in operating costs, airplane costs, and fares is expected to be zero, and the companys cost of capital is 12%. By how much would the value of the company increase if it accepted the better project (plane)? What is the equivalent annual annuity for each plane?
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