25-11: Western Airlines is considering a new route that will re- quire adding an additional Boeing 777 to its fleet. Western can purchase the airplane for $221.7 million or lease it for $25 million per year. If it purchases the airplane, its seating can be optimized, and the new route is expected to generate profits of $49.5 million per year. If leased, the route will only generate profits of $34.8 million per year. Suppose the appropriate cost of capital is 12.9% and that, if purchased, the plane can be sold at any time for an expected resale price of $221.7 million. Ignore taxes.

25-11: Western Airlines is considering a new route that will re- quire adding an additional Boeing 777 to its fleet. Western can purchase the airplane for $221.7 million or lease it for $25 million per year. If it purchases the airplane, its seating can be optimized, and the new route is expected to generate profits of $49.5 million per year. If leased, the route will only generate profits of $34.8 million per year. Suppose the appropriate cost of capital is 12.9% and that, if purchased, the plane can be sold at any time for an expected resale price of $221.7 million. Ignore taxes.

Intermediate Financial Management (MindTap Course List)

13th Edition

ISBN:9781337395083

Author:Eugene F. Brigham, Phillip R. Daves

Publisher:Eugene F. Brigham, Phillip R. Daves

Chapter12: Capital Budgeting: Decision Criteria

Section: Chapter Questions

Problem 16P: Shao Airlines is considering the purchase of two alternative planes. Plane A has an expected life of...

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Shao Airlines is considering the purchase of two alternative planes. Plane A has an expected life of 5 years, will cost $100 million, and will produce net cash flows of $30 million per year. Plane B has a life of 10 years, will cost $132 million, and will produce net cash flows of $25 million per year. Shao plans to serve the route for only 10 years. Inflation in operating costs, airplane costs, and fares are expected to be zero, and the company’s cost of capital is 12%. By how much would the value of the company increase if it accepted the better project (plane)? What is the equivalent annual annuity for each plane?
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