S-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 $32 million per year. Plane B has a life of 10 years, will cost $132 million and will produce net cash flows of $26 million per year. S-Airlines 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 14%.
A) By how much would the value of the company increase if it accepted the better project (plane)? Enter your answer in millions.
B) What is the equivalent annual annuity for each plane? Enter your answer in millions.
Plane A $ million Plane B $ million
S-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 $32 million per year. Plane B has a life of 10 years, will cost $132 million and will produce net cash flows of $26 million per year. S-Airlines 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 14%.
A) By how much would the value of the company increase if it accepted the better project (plane)? Enter your answer in millions.
B) What is the equivalent annual annuity for each plane? Enter your answer in millions.
| Plane A | $ million |
| Plane B | $ million |
Related questions
| Emperorâs Clothes Fashions can invest $6 million in a new plant for producing invisible makeup. The plant has an expected life of 5 years, and expected sales are 7 million jars of makeup a year. Fixed costs are $2.2 million a year, and variable costs are $1.80 per jar. The product will be priced at $2.60 per jar. The plant will be depreciated straight-line over 5 years to a salvage value of zero. The opportunity cost of capital is 10%, and the tax rate is 30%. |
| a. | What is project NPV under these base-case assumptions? (Do not round intermediate calculations. Enter your answer in millions rounded to 2 decimal places.) |
| NPV | $ million |
| b. | What is NPV if variable costs turn out to be $2.00 per jar? (Do not round intermediate calculations. Enter your answer in millions rounded to 2 decimal places.) |
| NPV | $ million |
| c. | What is NPV if fixed costs turn out to be $1.7 million per year? (Do not round intermediate calculations. Enter your answer in millions rounded to 2 decimal places.) |
| NPV | $ million |
| d. | At what price per jar would project NPV equal zero? (Enter your answer in dollars not in millions. Do not round intermediate calculations. Round your answer to 2 decimal places.) |
| Price | $ per jar |
