Shao Airlines is considering two alternative planes. Plane A has an expected lif

Question

Shao Airlines is considering two alternative planes. Plane A has an expected life of 5 years, will cost $100 million and will produce net cash flows of $30 million per year. Plane B has a life of 10 years, will cost $132 million and will produce net cash flows of $25 million per year. Shao plans to serve the route for only 10 years. Inflation in operating costs, airplane costs, and fares is expected to be zero, and the company's cost of capital is 12%.

By how much would the value of the company increase if it accepted the better project (plane)? Enter your answer in millions. For example, an answer of $1.2 million should be entered as 1.2, not 1,200,000. Round your answer to two decimal places.
$   million

What is the equivalent annual annuity for each plane? Enter your answer in millions. For example, an answer of $1.2 million should be entered as 1.2, not 1,200,000. Round your answers to two decimal places.

Explanation / Answer

Statement showing cash flows Plane A Plane B Particulars Time PVF Amoount PV Amoount PV Cash Outflows                   -             1.00 (100,000,000.00) (100,000,000.00) (132,000,000.00) (132,000,000.00) PV of cash outflows (100,000,000.00) (132,000,000.00) Cash Inflows              1.00       0.8929        30,000,000.00        26,785,714.29        25,000,000.00        22,321,428.57 Cash Inflows              2.00       0.7972        30,000,000.00        23,915,816.33        25,000,000.00        19,929,846.94 Cash Inflows              3.00       0.7118        30,000,000.00        21,353,407.43        25,000,000.00        17,794,506.20 Cash Inflows              4.00       0.6355        30,000,000.00        19,065,542.35        25,000,000.00        15,887,951.96 Cash Inflows              5.00       0.5674        30,000,000.00        17,022,805.67        25,000,000.00        14,185,671.39 Cash Inflows              6.00       0.5066        25,000,000.00        12,665,778.03 Cash Inflows              7.00       0.4523        25,000,000.00        11,308,730.38 Cash Inflows              8.00       0.4039        25,000,000.00        10,097,080.70 Cash Inflows              9.00       0.3606        25,000,000.00          9,015,250.62 Cash Inflows            10.00       0.3220        25,000,000.00          8,049,330.91 PV of cash Inflows      108,143,286.07      141,255,575.71 NPV          8,143,286.07          9,255,575.71    1,112,289.64 Value of company will increase by $9.3 Million Total PVF                      3.6048                           5.65 Equivalent Annual NPV          2,259,011.89          1,638,097.01

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