Question 3

The airline that you work for is considering flying a new route from Brisbane to Los

Angeles. To do this the airline will need to buy a new aircraft that is capable of the longer

distance. The plane will cost $50 million. Fuel and parking costs will be $5 million per

year. In addition, you will have labour costs summing to $8 million annually. You estimate

that the revenue per year will be $20 million. Your plane has a useful life of 10 years, will

be depreciated to a value of $0 and will be sold for scrap for $1000000 after 10 years

when you will cease flying the route. The cost of capital is 4%. The tax rate is 21%.

A. Calculate the operating cash flows for the project.

B. Calculate the NPV of the project. Should you proceed with the project?

C. Calculate the payback period. If you wanted to be paid back after 4 years should

you proceed?