Problem 10-15 Island Airlines Inc. needs to replace a short-haul commuter plane on one of its busier routes. Two aircraft are on the market that satisfy the general requirements of the route. One is more expensive than the other but has better fuel efficiency and load-bearing characteristics, which result in better long-term profitability. The useful life of both planes is expected to be about seven years, after which time both are assumed to have no value. Cash flow projections for the two aircraft follow. Low Cost High Cost Initial cost $510,000 $980,000 Cash inflows, years 1 through 7 102,000 167,156 a. Calculate the payback period for each plane and select the best choice. Round your answers to one decimal place. Low Cost years High Cost years b. Calculate the IRR for each plane and select the best option. Use the fact that all the inflows can be represented by an annuity. Round your answers to one decimal place. Low Cost High Cost IRR also selects the cost plane. C. Compare the results of parts (a) and (b). Both should select the same option, but does one method result in a clearer choice than the other based on the relative sizes of the two payback periods versus the relative sizes of the two IRRS? The input in the box below will not be graded, but may be reviewed and considered by your instructor. d. Calculate the NPV and PI of each project assuming a cost of capital of 8%. Use annuity methods. Do not round intermediate calculations. Round PVFA values in intermediate calculations to four decimal places. Round NPV to the nearest dollar, round PI to two decimal places. Low Cost High Cost NPV d. Calculate the NPV and PI of each project assuming a cost of capital of 8%. Use annuity methods. Do not round intermediate calculations. Round PVFA values in intermediate calculations to four decimal places. Round NPV to the nearest dollar, round PI to two decimal places. Low Cost High Cost NPV Which plane is selected by NPV? cost plane. By PI? cost plane. e. Calculate the NPV and PI of each project, assuming the following costs of capital: 2%, 4%, 6%, 8%, and 10%. Use annuity methods. Do not round intermediate calculations. Round PVFA values in intermediate calculations to four decimal places. Round NPV to the nearest dollar, round PI to two decimal places. Use a minus sign to indicate a negative NPV. Low Cost High Cost 2% NPV Problem 10-15 Island Airlines Inc. needs to replace a short-haul commuter plane on one of its busier routes. Two aircraft are on the market that satisfy the general requirements of the route. One is more expensive than the other but has better fuel efficiency and load-bearing characteristics, which result in better long-term profitability. The useful life of both planes is expected to be about seven years, after which time both are assumed to have no value. Cash flow projections for the two aircraft follow. Low Cost High Cost Initial cost $510,000 $980,000 Cash inflows, years 1 through 7 102,000 167,156 a. Calculate the payback period for each plane and select the best choice. Round your answers to one decimal place. Low Cost years High Cost years b. Calculate the IRR for each plane and select the best option. Use the fact that all the inflows can be represented by an annuity. Round your answers to one decimal place. Low Cost High Cost IRR also selects the cost plane. C. Compare the results of parts (a) and (b). Both should select the same option, but does one method result in a clearer choice than the other based on the relative sizes of the two payback periods versus the relative sizes of the two IRRS? The input in the box below will not be graded, but may be reviewed and considered by your instructor. d. Calculate the NPV and PI of each project assuming a cost of capital of 8%. Use annuity methods. Do not round intermediate calculations. Round PVFA values in intermediate calculations to four decimal places. Round NPV to the nearest dollar, round PI to two decimal places. Low Cost High Cost NPV d. Calculate the NPV and PI of each project assuming a cost of capital of 8%. Use annuity methods. Do not round intermediate calculations. Round PVFA values in intermediate calculations to four decimal places. Round NPV to the nearest dollar, round PI to two decimal places. Low Cost High Cost NPV Which plane is selected by NPV? cost plane. By PI? cost plane. e. Calculate the NPV and PI of each project, assuming the following costs of capital: 2%, 4%, 6%, 8%, and 10%. Use annuity methods. Do not round intermediate calculations. Round PVFA values in intermediate calculations to four decimal places. Round NPV to the nearest dollar, round PI to two decimal places. Use a minus sign to indicate a negative NPV. Low Cost High Cost 2% NPV
