Planet Airways has been given a 5-year license to start a budget airline between Stardust and Sundown. This service requires two planes which cost $6.5 million each, payable in one year’s time. Each aircraft will make one daily return trip, allowing for 350 flyable days per year. The remaining days of the year will be used to service the planes. The capacity of each plane is 200 passengers and the price per ticket is $550 per return trip. The average passenger load is 80 percent. The carrier’s office building will cost $26 million. Half of this amount is payable now and the balance is to be paid in a year’s time. The aircrafts and the building can be depreciated, for tax purposes, at the rate of 10% per annum of the initial cost. At the end of five years, the salvage values of the planes and the building are $2.6 million per plane and $7.8 million respectively. The operational costs will be $16,000 per one way trip (per flying day) and $6,000 per non-flying day, for each plane. The tax rate is 30 percent and taxes are paid one year in arrears. Required: Advise Planet Airways if it should proceed with this project. The cost of capital is 18 percent. State all your assumptions.
Planet Airways has been given a 5-year license to start a budget airline between Stardust and Sundown. This service requires two planes which cost $6.5 million each, payable in one year’s time. Each aircraft will make one daily return trip, allowing for 350 flyable days per year. The remaining days of the year will be used to service the planes.
The capacity of each plane is 200 passengers and the price per ticket is $550 per return trip. The average passenger load is 80 percent.
The carrier’s office building will cost $26 million. Half of this amount is payable now and the balance is to be paid in a year’s time. The aircrafts and the building can be
The operational costs will be $16,000 per one way trip (per flying day) and $6,000 per non-flying day, for each plane. The tax rate is 30 percent and taxes are paid one year in arrears.
Required: Advise Planet Airways if it should proceed with this project. The cost of capital is 18 percent. State all your assumptions.
Strategy: Find the after tax net cash flows in two steps. Step one presents the income statement with the aim of calculating the tax payments. Step two presents the cash flow statement so as to calculate the net cash flows, incorporating the tax payments (in arrears) found in step one
Assumptions
1. Sales and costs are in cash
2. Cash flows occur at the end of the year
3. Estimates are accurate (eg. 15 non-flying days pa, expected capacity, etc)
4. Tax credits are also in arrears
5. $16,000 per one-way trip (per flying day) implies 2 one-way trips per day
Step by step
Solved in 5 steps
