Exercise 16-12 Determining the payback period LO 16-4 Bailey Airline Company is

Question

Exercise 16-12 Determining the payback period LO 16-4

Bailey Airline Company is considering expanding its territory. The company has the opportunity to purchase one of two different used airplanes. The first airplane is expected to cost $14,850,000; it will enable the company to increase its annual cash inflow by $5,500,000 per year. The plane is expected to have a useful life of five years and no salvage value. The second plane costs $27,900,000; it will enable the company to increase annual cash flow by $9,300,000 per year. This plane has an eight-year useful life and a zero salvage value.

Determine the payback period for each investment alternative. (Round your answers to 1 decimal place.)

Payback Period:

Alternative 1 ___ Years

Alternative 2 ___ Years

Bailey Airline Company is considering expanding its territory. The company has the opportunity to purchase one of two different used airplanes. The first airplane is expected to cost $14,850,000; it will enable the company to increase its annual cash inflow by $5,500,000 per year. The plane is expected to have a useful life of five years and no salvage value. The second plane costs $27,900,000; it will enable the company to increase annual cash flow by $9,300,000 per year. This plane has an eight-year useful life and a zero salvage value.

Explanation / Answer

a-1 Alternative 1 = 14850000/5500000= 2.7 Alternative 2 = 27900000/9300000= 3 a-2 Alternative 1

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