C. A proposal to buy a helicopter. The machine was expensive and, counting additional training and licensing requirements, would cost $40,000 a year to operate. However, the versatility that the helicopter was expected to provide would generate over $1.5 million in additional revenue, and it would give the company access to a wider market as well. (See Figure 3 for details.)

Compute the payback period, net present value (NPV), Profitability Indexa based on cash flow. Use 10 % the required rate of return (discount rate) in your calculations. For the payback method, merely indicate the year in which the cash flow equals or exceeds the initial investment. You do not have to compute midyear points.

Figure 3 Financial analysis of Project C: Add a helicopter to the company's fleet Initial Expenditures Year 1 Year 2 Year 3 Year 4 Year 5 Net cost of helicopter........... $800,000 Additional revenue... $100,000 $ 200,000 $300,000 $450,000 $600,000 Additional operating costs.. 40,000 40,000 40,000 40,000 40,000 Depreciation...... 120.000 176.000 168,000 168,000 168.000 Net increase in in come (60,000) (16,000) 92,000 242,000 392,000 Less: Tax at 33%. 30.360 79.860 129.360 Increase in aftertax in come 60.000 (S 16.000 $ 61.640 $162.140 $262.640 Add back depreciation $120,000 $ 176,000 $168,000 $168,000 $168,000 Net change in cash flow ($800,000) 60,000 160,000 229,640 330,140 430,640