1. The CEO and other top executives of a firm with no nearby commercial airports make approximately 300 flights per year with an average cost per flight of $5,000. The firm is considering buying a Gulfstream jet for $15 million. The jet will reduce the cost of travel to $300,000 (including fuel, maintenance, and other jet-related expenses).

The firm expects to be able to resell the jet in five years for $12.5 million. The firm pays a 25 per cent corporate tax on its profits and can offset its corporate liabilities by using straight line depreciation on its fixed assets. The opportunity cost of capital is 4 per cent.

a. Should the firm buy this jet if it has sufficient taxable profits in order to take advantage of all tax shields?

b. Should the firm buy this jet if it does not have sufficient taxable profits in order to take advantage of new tax shields?

c. Suppose the firm could lease an airplane for the first year, with an option to extend the lease. Within that year they would find out whether the local government has decided to build an airport nearby which would reduce travel costs. How would this change your calculations?