you have become very successful and are considering the purchase of a plane for

Question

you have become very successful and are considering the purchase of a plane for your firm. The Piper model has an initial cost of $375,000, annual operating costs of $24,000 and a salvage value of $150,000. Its estimated holding period is 7 years. The Cessna model has an initial cost of $325,000, but annual operating costs of $29,500 and an estimated salvage value of $100,000. Its estimated holding period is 8 years. Your cost of capital is fifteen percent. Ignoring depreciation and taxes, which model would be the best choice assuming they both would perform the required tasks?

Explanation / Answer

Based on above analysis the capital outflow is more in model developed by Cessna. Therefore, we should assume Piper model will be the best choice assuming they both would perform the required tasks.

Cost of Capital 1.15 Piper Model Initial Cost 375,000 Annual Operating Cost 24,000 Salvage Value 150,000 Holding Period 7 NPV -418,460 Cost of Capital 1.15 Cessna Model Initial Cost 325,000 Annual Operating Cost 29,500 Salvage Value 100,000 Holding Period 8 NPV -424,686

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