World Travel leases airplanes to airline companies around the world. World Travel is

contemplating buying $25$ additional airplanes for its fleet. It is confident that this

purchase will not affect the risk of its business in the future. Here's what's known:

The airplanes depreciate straight$-$line over five years to zero book value.

These additional airplanes are estimated to generate $$210,000$ in earnings before

taxes and depreciation $($i$.$e$.,$ sales revenue minus costs of goods sold$)$ each year for

five years.

World Travel is unlevered.

World Travel pays a $22$ percent tax on its taxable income.

The required return on World Travel's unlevered equity is $11$ percent.

The annual risk$-$free rate $($the T$-$bill rate$)$ is $4$ percent.

Answer the following few questions:

a$.$ Calculate the highest possible price that World Travel can pay for the new airplanes to

make the purchase worthwhile, assuming that the company remains unlevered. $($You

can think of this question this way: calculate the "initial cost" of this airplane project

such that the Net Present Value of this project equals $$0.)$ Use the company's

required return on equity to discount the after$-$tax value of "revenues minus costs

of goods sold". Also, use the risk$-$free rate to discount the risk$-$free cash flows from

this project, such as the annual "depreciation tax shields" $($HINT: see OCF formula

in Ch$.6$ PowerPoint!$).($Do not round intermediate calculations and round your

answer to $2$ decimal places, e$.$g$.,32\mathrm{.}16.)$

b$.$ This time, forget about what you did in part $($a$)$ above. Imagine that World Travel is

able to purchase the airplanes for $$665,000.$ Also, imagine that World Travel can

borrow $$450,000$ for five years to cover part of the initial cost. This loan can be taken

at the risk$-$free rate which equals $4$ percent. The loan maturity is at the end of the fifth

year, and the loan principal will be paid off in one balloon payment. For this scenario,

what would be the APV of this airplane project? In other words, calculate the NPV of

this financed project that is adjusted for the financing side effects. $($Do not round

intermediate calculations and round your answer to $2$ decimal places, e$.$g$.,32\mathrm{.}16.)$

a$.$ Maximum price

b$.$ APV