Outback Airlines is considering the replacement of an existing international aircraft to accommodate greater volumes of passengers on flights between Sydney and London over the next 15 years.

The current Boeing 737-700 aircraft was purchased 11 years ago at a cost of $120 million and was planned to be depreciated over a 15-year useful life. It is anticipated this aircraft could be sold today for $80 million, with a 30% marginal tax rate to be used for evaluation purposes. The new Boeing 777-200ER replacement aircraft will cost $180 million in total (inclusive of training and modification costs) and is planned to be depreciated over a 15-year useful life.

Annual revenues associated with this flight path are projected to increase from $61.5 million to $82.7 million if this project was undertaken. Annual operating expenses would also increase from $49.2 million to $54.3 million. Outback Airlines plans to dispose of the aircraft in an eco-friendly manner at the end of the 15-year project, however associated costs and/or proceeds are assumed by management to be zero at this time.

Q1 Calculate the after-tax proceeds from selling the existing aircraft as of today. Q2 Calculate the projects net investment as of today. Q3 Calculate the projects annual after-tax net operating cash flows for years 1 through 15, as well as any termination cash flow occurring in the last year of the project. Q4 Assuming Outback Airlines cost of capital is 6%, should they accept this asset replacement project? Why or why not? Please support your answer with appropriate calculations, and briefly explain your answers.