Shao Airlines is considering the purchase of two alternative planes. Plane A has
ID: 2772802 • Letter: S
Question
Shao Airlines is considering the purchase of two alternative planes. Plane A has an expected life of 5 years, will cost $120 million, and will produce net cash flows of $35 million per year. Plane B has a life of 10 years, will cost $145 million, and will produce net cash flows of $28 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 10%. What is the NPV of plane B on a ten-year equivalent life basis?
$27,047,879 $8,143,286 $9,255,576 $21,595,356 $12,677,537Explanation / Answer
$27,047,879 Statemnet showing Cash flows Plane B Particulars Time PVf@10% Amount PV Cash Outflows - 1.00 (145,000,000.00) (145,000,000.00) PV of Cash outflows (145,000,000.00) Cash inflows 1.00 0.9091 28,000,000.00 25,454,545.45 Cash inflows 2.00 0.8264 28,000,000.00 23,140,495.87 Cash inflows 3.00 0.7513 28,000,000.00 21,036,814.43 Cash inflows 4.00 0.6830 28,000,000.00 19,124,376.75 Cash inflows 5.00 0.6209 28,000,000.00 17,385,797.05 Cash inflows 6.00 0.5645 28,000,000.00 15,805,270.04 Cash inflows 7.00 0.5132 28,000,000.00 14,368,427.31 Cash inflows 8.00 0.4665 28,000,000.00 13,062,206.65 Cash inflows 9.00 0.4241 28,000,000.00 11,874,733.31 Cash inflows 10.00 0.3855 28,000,000.00 10,795,212.10 PV of Cash Inflows 172,047,878.96 NPV 27,047,878.96
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