Caribbean Airlines (CAL) is planning to acquire a plane for $50 million. The tax rate of CAL is30% and its cost of capital 10%. They will depreciate it completely on a straight-line basis witha lifespan of 5 years. The plane estimate pretax annual income is $20 million (not includingmaintenance costs). The resale value and the annual maintenance cost (in millions) of theplane are variable as shown in the following table:Time0 year1 year2 year3 yearMaintenance$0$5 million$8 million$10 million$12 million$15 millionResale value$50 million$45 million$40 million$35 million4 year5 yearWhat is the optimal time that CAL should keep the airplane flying?O a. Optimal 2 yearsO b.Optimal 3 yearsO c.Optimal 4 yearsO d.Optimal 5 years$30 million$25 million

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hat is the optimal time that CAL should keep the airplane flying?

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter19: Lease And Intermediate-term Financing

Section: Chapter Questions

Problem 4P

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Question

Caribbean Airlines (CAL) is planning to acquire a plane for $50 million. The tax rate of CAL is
30% and its cost of capital 10%. They will depreciate it completely on a straight-line basis with
a lifespan of 5 years. The plane estimate pretax annual income is $20 million (not including
maintenance costs). The resale value and the annual maintenance cost (in millions) of the
plane are variable as shown in the following table:
Time
0 year
1 year
2 year
3 year
Maintenance
$0
$5 million
$8 million
$10 million
$12 million
$15 million
Resale value
$50 million
$45 million
$40 million
$35 million
4 year
5 year
What is the optimal time that CAL should keep the airplane flying?
O a. Optimal 2 years
O b.
Optimal 3 years
O c.
Optimal 4 years
O d.
Optimal 5 years
$30 million
$25 million

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