Capital Budgeting Problem (15 points total)

Delta Airlines is currently operating a Boeing 757 on the route from RDU to Paris-CDG, and is considering the project of replacing the Boeing 757 with a Boeing 767 to increase capacity on this route. Delta's CFO has produced the following estimates for the incremental EBIT and Net Working Capital for the first two years of this project (consider time 0 to be 2021).

• EBIT: $2M (million) in 2022 (time 1) and $4M in 2023 (time 2).
• Net Working Capital: Expected to increase from 0 in 2021 to $2M in 2022, and then to $3M in 2023.

Delta plans to buy the new Boeing 767 for $120M in 2021, and will depreciate it straight-line over 20 years. The old Boeing 757 will be sold for $48M in 2021 and has been fully depreciated.

Assume that Delta is subject to a corporate tax rate of 35% and that the cost of capital (i.e., discount rate) is 10%.

Based on this information, answer Questions 4 through 9 below.

A) What is the cash ow in year 2021 due to the capital expenditure on the new Boeing 767 and the asset sale of the old Boeing 757?

Group of answer choices

$46.8M

$61.2M

$72.0M

$88.8M

B)

What is the Unlevered Net Income (UNI) for years 2022 and 2023 (time 1 and time 2)?

Group of answer choices

$0.7M in 2022, and $1.4M in 2023

$1.3M in 2022, and $2.0M in 2023

$1.3M in 2022, and $2.6M in 2023

$1.8M in 2022, and $2.5M in 2023

C)

What is the project's Free Cash Flow in year 2022?

Group of answer choices

$4.7M

$5.3M

$6.0M

$6.7M

D)

What is the project's Free Cash Flow in year 2023?

Group of answer choices

$5.6M

$6.6M

$7.6M

$9.6M

e)

The CFO expects the Free Cash Flows to stay constant at their 2023 level in perpetuity after 2023. What is the terminal value of the project in 2023 (i.e., PV as of 2023 of all the FCFs coming in 2024 and beyond)?

Group of answer choices

$66.0M

$69.1M

$76.0M

$83.6M

f)

Under the assumptions from Question 8, what is the Net Present Value of the project?

Group of answer choices

$14.9M

$3.7M

$12.5M

$18.3M