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Ghost Squadron Historical Aircraft, Inc. (GSHAI) is considering adding a rare World War II B-24 bomber to its collection of vintage aircraft. The plane was forced down in Burma in 1942, and it has remained there ever since. Flying a crew to Burma and collecting the wreckage will cost $100,000. Transporting all the parts to the companys restoration facility in Texas will cost another $35,000. Restoring the plane to flyable condition will cost an additional $600,000 at t₀.

GSHAIs operating costs will increase by $40,000 a year at the end of years 1 through 7 (on top of the restoration costs). At the end of years 3 through 7, revenues from exhibiting the plane at airshows will be $70,000. At the end of year 7, the plane will be retired. At that time, the plane will be sold to a museum for $500,000.

The plane falls into the MACRS depreciation class for seven-year assets. GSHAIs combined federal and state income tax rate is 35 percent, and the companys weighted average cost of capital is 12 percent. Calculate the NPV and IRR of the proposed investment in the plane

PROBLEM 11-9 GHOST SQUADRON HISTORICAL AIRCRAFT, INC. ASSUMPTIONS Yr 1 14.3% Yr 2 245% Yr 3 17.5% Yr 5 8.9% Yr 7 8.9% MACRS Depreciation 12.5% 8.9% 45% 35% 12% Tax rate Cost of capital ESTIMATED INCREMENTAL CASH FLOWS: Initial Investment at t=0 Crew transport & wreckage collection Transport to restoration facility Plane restoration Total Initial Investment Year New Revenues Additional operating expenses Depreciation on plane Change in Operating Income lax on new income Change in Earnings after tax Add back depreciation Net Incremental Cash Flows Additional Cash Flows at the end of year7 Proceeds from sale of plane Book value of plane Taxable gain(loss) Tax on gain Net cash flow from sale of plane (Salvage value less tax on gain) SUMMARY OF NET CASH FLOWS: Time Net present Value: Internal rate of Return