Question
Shao Airlines is considering two alternative planes. Plane A has an expected life of 3 years, will cost $5 million, and will produce net cash
Shao Airlines is considering two alternative planes. Plane A has an expected life of 3 years, will cost $5 million, and will produce net cash flows of $3.75 million per year. Plane B has a life of 5 years, will cost $8.5 million, and will produce net cash flows of $4 million per year. Shao plans to serve the route indefinitely. Inflation in operating costs, airplane costs, and fares is expected to be zero, and the company's cost of capital is 15 percent. By how much would the value of the company increase per year if it accepted the better project (plane)?
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