The controller of the Front Range Airways is considering the addition of a new on$-$site maintenance facility at its main airport of Centennial Airport. The addition will has two primary benefits: to eliminate its reliance on the maintenance of its fleet by outside contractors and create the opportunity to sell its maintenance program to other commuter airlines. The new maintenance facility will allow the Front Range Airways not only to reduce its operating costs but also to increase its revenue. The new on$-$site maintenance program is expected to reduce the fleet$$s downtime by $1$ day which allows the Front Range Airlines to schedule more flights. The question for the controller is whether these expected benefits were enough to justify the $$24$ million capital outlay plus the incremental investment in working capital over the six$-$year life of the project.

Construction will start in January $2024.$ $$22$ million of the capital outlay will be spent in $2024$ and the remaining $$2$ million will be used in $2025.$ When the new on$-$sire maintenance facility begins operating in $2025,$ it is expected to significantly reduce the operating costs of the airline. These operating savings will come mainly from the difference between the cost of self$-$maintenance and the cost of buying maintenance contract from the open market. The controller$$s estimate shows that the operating savings will be $$2$ million for $2025$ and $$2\mathrm{.}5$ million per year for the following five years.

The controller also plans to take advantage of reduced fleet downtime to schedule more flights to create additional revenue. For $2025,$ she expects to show additional $$4$ million revenue from its increased utilization of the airline$$s fleet. She expects the additional revenue to top at $$10$ million in $2026$ and continue to stay at that level through $2030.$ It is estimated that the cost of goods sold $($mainly fuel$)$ will be $68\%$ of revenue, and SG&A will be $5\%$ of revenue.

In addition to the capital outlay of $$24$ million, this project will require the Front Range Airways to invest in increased level of inventories and accounts receivable. No changes in current liabilities are expected from this project. The total net working capital is expected to average $10\%$ of annual revenue. This means that the amount of net working capital investment each year will equal $10\%$ of incremental revenue for the year. At the end of the life of the project in $2030,$ all the net working capital on the books will be recoverable at cost$.$ The salvage value of the capital outlay is expected to be zero. Tax rate would be $21\%,$ and the capital outlay of $$24$ million will be depreciated under straight$-$line schedule, starting $2025.$

The firm$$s long$-$term bond is rated as Baa as of today. The firm$$s stock beta is $1\mathrm{.}25.$ Other financial information is provided in the Exhibits below.

Should this company accept this project?Exhibit $1$: Interest rates information $($December $2023)$

Bank loan rate $($LIBOR$)$

$1-$year $2\mathrm{.}17\%$

Treasury Bonds

$1-$year $1\mathrm{.}83\%5-$year $2\mathrm{.}25\%10-$year $2\mathrm{.}46\%30-$year $2\mathrm{.}81\%$

Market risk premium

Historical average over $6\mathrm{.}5\%$ T$-$bill

Historical average over $5\mathrm{.}25\%$ T$-$bond

Corporate Bonds $(10-$year maturities$)$

Aaa $3\mathrm{.}51\%$ Aa $3\mathrm{.}71\%$ A $3\mathrm{.}96\%$ Baa $4\mathrm{.}23\%$

Exhibit $2$: Front Range Airways Financial Information $($December $2023)$

Balance sheet information $($$ millions$)$

Current portion of long$-$term debt Long$-$term debt

Common stock

Retained earnings

Share information $($per$-$share$)$

Shares outstanding $($millions$)$ Book value per share

Share price as of December $2023$

Other information

Bond rating of the firm Beta

$ $3002,0004501,850$

$400$

$ $5\mathrm{.}75$ $$25\mathrm{.}00$

Baa $1\mathrm{.}25$