Question
You are contemplating the purchase of a one-half interest in a corporate airplane to facilitate the expansion of your business into two new geographic area.
You are contemplating the purchase of a one-half interest in a corporate airplane to facilitate the expansion of your business into two new geographic area. The acquisition would eliminate about $220,000 in estimates annual expenditures for commercial flights over the next 10 years. The total,cost for the half share is $6 million plus associated annual operating costs of $100,000. Assume the plane can be fully depreciated on a straight line basis for tax purposes over 10 years. The companys weighted average cost of capital is 8% and its corporate tax rate is 40%. If positive, how much value is being created for the company through this purchase of this asset? If negative, what additional cash flows would be needed for the NPV to equal zero. To what phenomena might these additional positive cash flows be ascribable?
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