Information needed to answer the question:

4. Timco airlines is a large airplane maker. It recently built the T123. It can carry 500 passengers on two levels. Initial project investments were $13B. Assume that the initial investment was paid on Dec 31, 2010. Assume that Timco will produce 60 aircraft per year for five years. Each aircraft will be sold for $230M and total operating costs are 75% of revenues. Assume that revenues and costs occur at year-end with the first revenues (and costs) occurring on Dec 31, 2011. What is the NPV of the project if Timcos cost of capital is 11%? Calculate the NPV as of Dec 31, 2010. Ignore taxes and assume that there are no terminal year cash flows. Show your work, as appropriate and clearly state your answer (5 points)

Revenue = 60*230

=13800 million

Cash flow = 13800*(1-0.75)

=3450

Year	Cash Flow	DF	PV
0	-13000	1	-13000.00
1	3450	0.9009	3108.11
2	3450	0.8116	2800.10
3	3450	0.7312	2522.61
4	3450	0.6587	2272.62
5	3450	0.5934	2047.41
		NPV	-249.16

5. What is the payback period for the Timco investment outlined in #4? What does the payback period calculation mean? In other words, interpret your answer. (5 marks)

First three years of cash flows = 10350 M

Payback = 3 years + (13000-10350)/ CF of year 4

= 3 + 2650/3450

=3.77 years

Question:

8. It is Jan 1, 2016 and Timco completed the project referenced in questions 4 and 5 above. The project went well. The company is now planning to make a special add-on investment that will enhance the usefulness of the new plane. The changes will cost $3 million in total, with the expenditure occurring at the end of the year three years from today. The changes will bring year-end after-tax cash inflows of $2 million at the end of the two succeeding years. It will then cost $.5 million to dispose of specialized waste generated by the project at the end of the 3rd year of operation.

(a) What is the project's IRR? (2 marks)

(b) If the Timco requires a minimum return of 10%, should this project be accepted? Why? What if the minimum return was 15%? (3 marks)