A leading regional airline that is now carrying 54% of all the passengers that pass through the Sout heast is considering the possibility of adding a new long-range aircraft to its fleet. The aircraft being considered for purchase is the Boeing 717-200. which is quoted at $35 million per unit. Boeing requires a 10% down payment at the time of delivery. and the ba lance is to be paid over a 10-year period at an interest rate of 9% compounded annually. The actual payment schedule calls for making only interest payments over the 10-year period. with che original principal amount to be paid off at the end of the 10th year. The airline expects togenerate $40 million per year by adding this aircraft to its current fleet but also estimates an operating and maintenance cost of $30 million per year. The aircraft is expected to have a 15-year service life with a salvage value of 15% of the original purchase price. If the airline purchases the aircraft. it will be depreciated by the seven-year MACRS property classification. The firm's combined federal and state marginal tax rate is 38%. and its MARR is 18°Ai.(a) Determ ine the cash flow associated with the debt financing.(b) Is th is project acceptable?
A leading regional airline that is now carrying 54% of all the passengers that pass through the Sout heast is considering the possibility of adding a new long-range aircraft to its fleet. The aircraft being considered for purchase is the Boeing 717-200. which is quoted at $35 million per unit. Boeing requires a 10% down payment at the time of delivery. and the ba lance is to be paid over a 10-year period at an interest rate of 9% compounded annually. The actual payment schedule calls for making only interest payments over the 10-year period. with che original principal amount to be paid off at the end of the 10th year. The airline expects to
generate $40 million per year by adding this aircraft to its current fleet but also estimates an operating and maintenance cost of $30 million per year. The aircraft is expected to have a 15-year service life with a salvage value of 15% of the original purchase price. If the airline purchases the aircraft. it will be
(a) Determ ine the cash flow associated with the debt financing.
(b) Is th is project acceptable?
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