What is the answer to the following question? a) 1 b) 2 c) 3 d) 4 e) 5 A flight

Question

What is the answer to the following question?

a) 1

b) 2

c) 3

d) 4

e) 5

A flight school operates 5 airplanes of the different types. All airplanes are outdated and require some modifications. The school has $33,000 available in the budget for the airplane modification this year which cannot cover all airplanes. An aviation engineer came up with the plan to update all airplanes. Some details of the plan are shown in the following table: AiroplaneModification Present cost worth of benefits $6,000 $54,000 $9,000 $56,000 $7,000 $55,000 4 $11,000 $59,000 $8,000 $60,000 2 3 Which airplane modification does the school have to postpone until next year?

Explanation / Answer

Option (d).

Let us compute Profitability Index (PI) where PI = Present worth of benefits / Modification cost

PI, Airplane 1: ($54,000 / $6,000) = 9

PI, Airplane 2: ($56,000 / $9,000) = 6.22

PI, Airplane 3: ($55,000 / $7,000) = 7.86

PI, Airplane 4: ($59,000 / $11,000) = 5.36

PI, Airplane 5: ($60,000 / $8,000) = 7.5

Ranking in descending order of PI, the airplanes are:

Airplane 1 > Airplane 3 > Airplane 5 > Airplane 2 > Airplane 4.

Total modification cost for Airplanes 1, 3, 5 and 2 = $(6,000 + 7,000 + 8,000 + 9,000) = $30,000

So Airplane 4 has to be left out.

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