Question
Southwest Airlines wants to increase their fleet by 10 planes. Each plane will cost $18 M. They expect that the increase in EBITDA from these
Southwest Airlines wants to increase their fleet by 10 planes. Each plane will cost $18 M. They expect that the increase in EBITDA from these planes will start at $55 M per year and grow at 4% per year. These planes will be in service for 6 years, so Southwest Airlines will depreciate the plane on a straight line basis (to 0) over these 6 years. The networking capital required for each plane starts at $0.3 M (t=0) for a total of $3 M and is expected to increase at 6% per year. At the end of the 6 years, Southwest will be able to sell the planes back to the manufacturer for $2 M per plane. If Southwest airlines has a tax rate of 18% and a discount rate of 10%, what is the NPV of this project?
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