Question
Shao Airlines is considering the purchase of two alternative planes. Plane A has an expected life of 5 years, will cost $100 million, and will
Shao Airlines is considering the purchase of two alternative planes. Plane A has an expected life of 5 years, will cost $100 million, and will produce net cash flows of $28 million per year. Plane B has a life of 10 years, will cost $132 million and will produce net cash flows of $27 million per year. Shao plans to serve the route for only 10 years. Inflation in operating costs, airplane costs, and fares are expected to be zero, and the company's cost of capital is 9%.
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By how much would the value of the company increase if it accepted the better project (plane)? Enter your answer in millions. For example, an answer of $1.23 million should be entered as 1.23, not 1,230,000. Do not round intermediate calculations. Round your answer to two decimal places.
$ ___________ million
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What is the equivalent annual annuity for each plane? Enter your answers in millions. For example, an answer of $1.23 million should be entered as 1.23, not 1,230,000. Do not round intermediate calculations. Round your answers to two decimal places.
Plane A: $__________ million
Plane B: $ __________ million
The Scampini Supplies Company recently purchased a new delivery truck. The new truck cost $22,500, and it is expected to generate net after-tax operating cash flows, including depreciation, of $6,250 per year. The truck has a 5-year expected life. The expected salvage values after tax adjustments for the truck are given below. The company's cost of capital is 9 percent.
Year | Annual Operating Cash Flow | Salvage Value | ||
0 | -$22,500 | $22,500 | ||
1 | 6,250 | 17,500 | ||
2 | 6,250 | 14,000 | ||
3 | 6,250 | 11,000 | ||
4 | 6,250 | 5,000 | ||
5 | 6,250 | 0 |
- What is the optimal number of years to operate the truck? Do not round intermediate calculations. Round your answers to the nearest whole number.
____________ years
- Would the introduction of salvage values, in addition to operating cash flows, ever reduce the expected NPV and/or IRR of a project?
I. Salvage possibilities would have no effect on NPV and IRR. II. No. Salvage possibilities could only raise NPV and IRR. III. Yes. Salvage possibilities could only lower NPV and IRR.
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