Shao Airlines is considering the purchase of two alternative planes. Plane A has an expected life of 5 years, will cost $120 million, and will produce net cash flows of $35 million per year. Plane B has a life of 10 years, will cost $145 million, and will produce net cash flows of $28 million per year. Shao plans to serve the route for only 10 years. Inflation in operating costs, airplane costs, and fares is expected to be zero, and the companys cost of capital is 10%. What is the equivalent annual annuity for plane A?
QUESTION 9
Shao Airlines is considering the purchase of two alternative planes. Plane A has an expected life of 5 years, will cost $120 million, and will produce net cash flows of $35 million per year. Plane B has a life of 10 years, will cost $145 million, and will produce net cash flows of $28 million per year. Shao plans to serve the route for only 10 years. Inflation in operating costs, airplane costs, and fares is expected to be zero, and the companys cost of capital is 10%. What is the NPV of plane B on a ten-year equivalent life basis?
QUESTION 10
The Scampini Supplies Company recently purchased a new delivery truck. The new truck cost $20,000, and it is expected to generate net after-tax operating cash flows, including depreciation, of $7,000 per year. The truck has a 5-year expected life. The expected salvage values after tax adjustments for the truck are given below. The companys cost of capital is 12%. What is ithis project's optimal economic life?
| Year | Annual Operating Cash Flow | Salvage Value |
| 0 | ($20,000) | $20,000 |
| 1 | 7,000 | 16,000 |
| 2 | 7,000 | 14,000 |
| 3 | 7,000 | 12,000 |
| 4 | 7,000 | 8,000 |
| 5 | 7,000 | 0 |
