If available, solve using excel functions DirectJet Airlines is considering impr

Question

If available, solve using excel functions

DirectJet Airlines is considering improving customer service. Directjet is looking into offering one of the following two free services to customers: 5.9 Free live television services onboard its aircraft with the first cost of $70 million and annual operating cost of $5 million for 10 years with no salvage value. Free high speed internet services onboard its aircraft with the first cost of $25 million and annual operating cost of $15 million for ve vears. DirectJet's MARR is 9 percent. Using a study period of five years, which alternative is cost efficient? The following table presents the cash flows for both alternatives. Live Television (LT) High Speed Internet (HSI) $25,000,000 -$15,000,000 -$15,000,000 -$15,000,000 -$15,000,000 -$15,000,000 Year -$70,000,000 -$5,000,000 -$5,000,000 -$5,000,000 -$5,000,000 -$5,000,000 -$5,000,000 -$5,000,000 -$5,000,000 10

Explanation / Answer

LT:

PV = -102,088,288.51, FV = 0, N = 10, rate = 9%

use PMT funciton in Excel

equivalent annual costs = 15,907,406.29

HSI:

PV = -83,344,768.95, FV = 0, N = 5, rate = 9%

Equivalnt annual costs = 21,427,311.42

so the first option is better

Discount rate 9.0000% Cash flows Year Discounted CF= cash flows/(1+rate)^year Cumulative cash flow (70,000,000.000) 0                  (70,000,000.00)               (70,000,000.00)      (5,000,000.000) 1                     (4,587,155.96)               (74,587,155.96)      (5,000,000.000) 2                     (4,208,399.97)             (78,795,555.930)      (5,000,000.000) 3                     (3,860,917.40)               (82,656,473.33)      (5,000,000.000) 4                     (3,542,126.06)               (86,198,599.39)      (5,000,000.000) 5                     (3,249,656.93)               (89,448,256.32)      (5,000,000.000) 6                     (2,981,336.63)               (92,429,592.95)      (5,000,000.000) 7                     (2,735,171.22)               (95,164,764.18)      (5,000,000.000) 8                     (2,509,331.40)               (97,674,095.57)      (5,000,000.000) 9                     (2,302,138.90)               (99,976,234.47)      (5,000,000.000) 10                     (2,112,054.03)             (102,088,288.51)

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