1: TF Airline is debating the purchase of a new passenger airplane. TFA would se
ID: 2818338 • Letter: 1
Question
1:
TF Airline is debating the purchase of a new passenger airplane. TFA would sell one of its older planes in order to buy the new one and anticipates that the replacement will enable it to service more destinations. The plane that would be sold was purchased 15 years ago for $25 million, and has been depreciated to a book value of zero. TFA believes that this old plane could be sold now for $3 million. The new plane will cost $40,000,000, plus $250,000 for delivery and licensing. The new plane qualifies as a 10-year asset under MACRS guidelines (10%, 18%, 14%, 12%, 9%, 8%, 7%, 6%, 6%, 6%, and 4%). TFA estimates that at the end of the new plane’s 10-year economic life, it will have a market value of $4.5 million. If TFA decides not to buy the new plane, the old plane will continue to be used for 10 more years, at which time its salvage value would be zero. For those ten years, TFA expects to generate $450 million per year with operating costs of $300 million. If TFA decides to buy the new airplane, it expects annual revenues to be $500 million with $325 million operating costs respectively. TFA has an estimated cost of capital of 14%, and its marginal tax rate is 40%. Compute the net, after-tax operating cash flow in year 4.
Question options:
16.091m
17.981m
16.295m
16.932m
2:
TF Airline is debating the purchase of a new passenger airplane. TFA would sell one of its older planes in order to buy the new one and anticipates that the replacement will enable it to service more destinations. The plane that would be sold was purchased 15 years ago for $25 million, and has been depreciated to a book value of zero. TFA believes that this old plane could be sold now for $3 million. The new plane will cost $40,000,000, plus $250,000 for delivery and licensing. The new plane qualifies as a 10-year asset under MACRS guidelines (10%, 18%, 14%, 12%, 9%, 8%, 7%, 6%, 6%, 6%, and 4%). TFA estimates that at the end of the new plane’s 10-year economic life, it will have a market value of $4.5 million. If TFA decides not to buy the new plane, the old plane will continue to be used for 10 more years, at which time its salvage value would be zero. For those ten years, TFA expects to generate $450 million per year with operating costs of $300 million. If TFA decides to buy the new airplane, it expects annual revenues to be $500 million with $325 million operating costs respectively. TFA has an estimated cost of capital of 14%, and its marginal tax rate is 40%. Compute the after-tax terminal flow generated by the project.
Question options:
$3.001m
$3.344m
$3.560m
$3.898m
16.091m
17.981m
16.295m
16.932m
2:
TF Airline is debating the purchase of a new passenger airplane. TFA would sell one of its older planes in order to buy the new one and anticipates that the replacement will enable it to service more destinations. The plane that would be sold was purchased 15 years ago for $25 million, and has been depreciated to a book value of zero. TFA believes that this old plane could be sold now for $3 million. The new plane will cost $40,000,000, plus $250,000 for delivery and licensing. The new plane qualifies as a 10-year asset under MACRS guidelines (10%, 18%, 14%, 12%, 9%, 8%, 7%, 6%, 6%, 6%, and 4%). TFA estimates that at the end of the new plane’s 10-year economic life, it will have a market value of $4.5 million. If TFA decides not to buy the new plane, the old plane will continue to be used for 10 more years, at which time its salvage value would be zero. For those ten years, TFA expects to generate $450 million per year with operating costs of $300 million. If TFA decides to buy the new airplane, it expects annual revenues to be $500 million with $325 million operating costs respectively. TFA has an estimated cost of capital of 14%, and its marginal tax rate is 40%. Compute the after-tax terminal flow generated by the project.
Question options:
$3.001m
$3.344m
$3.560m
$3.898m
Explanation / Answer
Initial cost of plane= 40000000+250000 = 40250000
1: OCF for year 4 will be as follows
Additional Revenue generated= (500,000,000-450,000,000) = 50,000,000
Less:Additional Operating costs =(325,000,000- 300,000,000) = 25,000,000
Less: Depreciation = 12%*40250,000=4830000
Net Income before tax = 20170000
Less: Tax = 40%* 20170000 = 8068000
Net Income= 12102000
Add back depreciation = 4830000
Operating cash flow= 16932000
So Option 4 16.932 m is the right answer
2:
Selling price= 4,500,000
Less: Book value = 4%*40250000= 1610000
Gain = 2890000
Tax on gain = 1156000
Terminal value after tax = 4500,000-1156,000= 3344000
Option 2 is the right m
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