Question 5 [40]

Aviation Corporation is an airline that provides air cargo services to the SADEC countries. The executive committee is considering expanding its airline services by purchasing an additional aircraft. The company has to choose between two aircraft for this purpose, namely the Antonov AN12 or the Lockheed L100 Hercules. The current acquisition cost of the Antonov AN12 is R9 million and that of the Lockheed L100 Hercules is R8.4 million. The company's weighted average cost of capital (WACC) is 13%. The project team responsible for this capital investment project provided the following net cash flow estimates for the next five years:

Year Antonov Lockheed

2021 2 500 000 2 400 000

2022 2 700 000 2 800 000

2023 3 000 000 2 900 000

2024 3 200 000 2 300 000

2025 2 900 000 2 700 000

Required:

Show all calculations and round off all answers to the nearest rand.

5.1. Use the information provided to calculate the net present values of the two capital expenditure options. (18)

5.2. Calculate the internal rate of return for both investments under consideration. Use 25% as an alternative rate of return. (16)

5.3. Which aircraft should the company purchase? Give reasons for your answer. (6)