Question
The president of Albatross Airlines has asked you to evaluate the proposed acquisition of a new airplane. The aircrafts price is $70,000 but some modifications
The president of Albatross Airlines has asked you to evaluate the proposed acquisition of a new airplane. The aircrafts price is $70,000 but some modifications are required. The additional modification costs are estimated to be $10,000. The airplane falls in MACRS 3-year class for depreciation purposes. The purchase of the plane would require an increase in net working capital of $4,000. The plane will increase the firms before tax revenues by $40,000 per year but will also increase operating costs by $10,000 per year. The plane will be used for 3 years and then sold for $30,000. The firms marginal tax rate is 40% and the cost of capital is 12%.
(MACRS depreciation allowances for a 3-year life asset are: Year 1 = 33%; Year 2 = 45%; Year 3 = 15%; Year 4 = 7%)
Calculate the projects NPV, IRR, and profitability index. Clearly state your recommendation.
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