Question

In: Accounting

An airline is considering purchasing a new Boeing aircraft that is quoted at $35 million per...

An airline is considering purchasing a new Boeing aircraft that is quoted at
$35 million per unit. Boeing requires a 10% down payment paid at the time of delivery,
and the balance is to be paid over a 10-year period at an interest rate of 9% compounded
annually (see the hints below for better explanation). The actual payment schedule calls
for making only interest payments over the 10-year period, with the original principal
amount to be paid off at the end of the 10th year. The expected annual revenue is $40
million, while the annual operating and maintenance cost is $30 million. The aircraft is
expected to have a 15-year service life with a salvage value of 15% of the original
purchase price, and will be depreciated by the seven-year MACRS property
classification. The firm’s combined federal and state marginal tax rate is 38%. The
MARR is 18%.


(a.) Determine the cash flow of the entire project associated with the debt
financing. Use excel spreadsheet and present your calculation using the cash
flow table

- Assume all values are in today’s money (do not inflate).
- 10% down payment is paid at year 0 (10% of the $35M)
- 9% of the unpaid principal ($35M - $3.5M down payment) is paid every year
to Boeing from year 1 to year 10.
- Unpaid principal ($35M - $3.5M down payment) is paid as lump sum at year
10.

Solutions

Expert Solution

Depreciation Purchase price(a) Rate(b) Depreciation(c= a*b) Tax rate(d) Tax benefit(c*d)
1 35 14.29% 5.0015 38% 1.90057
2 35 24.49% 8.5715 38% 3.25717
3 35 17.49% 6.1215 38% 2.32617
4 35 12.49% 4.3715 38% 1.66117
5 35 8.93% 3.1255 38% 1.18769
6 35 8.92% 3.122 38% 1.18636
7 35 8.93% 3.1255 38% 1.18769
8 35 4.46% 1.561 38% 0.59318
Particulars Year(in million)
0 1 2 3 4 5 6 7 8 9 10
Initial down payment(a) -3.5 0 0 0 0 0 0 0 0 0 -31.5
Annual revenue(b) 40 40 40 40 40 40 40 40 40 40
Operating expenses(c) -30 -30 -30 -30 -30 -30 -30 -30 -30 -30
Depreciation benefit(see table)(d) 1.90057 3.25717 2.32617 1.66117 1.18769 1.18636 1.18769 0.59318 0 0
FV at compound interest @ 9%(e) using FV function in excel ₹ -34.34 ₹ -37.43 ₹ -40.79 ₹ -44.46 ₹ -48.47 ₹ -52.83 ₹ -57.58 ₹ -62.77 ₹ -68.41 ₹ -74.57
Interest expense(f) ₹ -2.84 ₹ -3.09 ₹ -3.37 ₹ -3.67 ₹ -4.00 ₹ -4.36 ₹ -4.75 ₹ -5.18 ₹ -5.65 ₹ -6.16
Tax benefit at 38%(g) ₹ 1.08 ₹ 1.17 ₹ 1.28 ₹ 1.40 ₹ 1.52 ₹ 1.66 ₹ 1.81 ₹ 1.97 ₹ 2.15 ₹ 2.34
Net cash flow(a+b-c+d-f+g) ₹ -3.50 ₹ 10.14 ₹ 11.34 ₹ 10.24 ₹ 9.38 ₹ 8.71 ₹ 8.48 ₹ 8.24 ₹ 7.38 ₹ 6.50 ₹ -25.32
Discount factor at 18% 1 0.847458 0.718184 0.608631 0.515789 0.437109 0.370432 0.313925 0.266038 0.225456 0.191064
Present value of cash flow(discount factor * net cash flow) ₹ -3.50 ₹ 8.60 ₹ 8.15 ₹ 6.23 ₹ 4.84 ₹ 3.81 ₹ 3.14 ₹ 2.59 ₹ 1.96 ₹ 1.46 ₹ -4.84

FV function formula used is FV= FV(rate,Period,payment,PV,Type) using excel the values have been derived.

Interest expense (in million)
Year FV(a) Interest Calculation
0 31.5
1 34.34 2.84 34.34-31.5
2 37.43 3.09 37.43-34.34
3 40.79 3.36 40.79-37.43
4 44.46 3.67
5 48.47 4.01
6 52.83 4.36
7 57.58 4.75
8 62.77 5.19
9 68.41 5.64
10 74.57 6.16

ekkarill92 answered 2 months ago
Next > < Previous

Related Solutions

An airline is considering purchasing a new Boeing aircraft that is quoted at $35 million per...
An airline is considering purchasing a new Boeing aircraft that is quoted at $35 million per unit. Boeing requires a 10% down payment paid at the time of delivery, and the balance is to be paid over a 10-year period at an interest rate of 9% compounded annually (see the hints below for better explanation). The actual payment schedule calls for making only interest payments over the 10-year period, with the original principal amount to be paid off at the...
An airline is considering purchasing a new Boeing aircraft that is quoted at $35 million per...
An airline is considering purchasing a new Boeing aircraft that is quoted at $35 million per unit. Boeing requires a 10% down payment paid at the time of delivery, and the balance is to be paid over a 10-year period at an interest rate of 9% compounded annually (see the hints below for better explanation). The actual payment schedule calls for making only interest payments over the 10-year period, with the original principal amount to be paid off at the...
An airline owns an aging fleet of Boeing 737 jet airplanes. It is considering a major...
An airline owns an aging fleet of Boeing 737 jet airplanes. It is considering a major purchase of up to 17 new Boeing model 787 and 767 jets. The decision must take into account numerous cost and capability factors, including the following: (1) the airline can finance up to $1.6 billion in purchases; (2) each Boeing 787 will cost $80 million, and each Boeing 767 will cost $110 million; (3) at least one-third of the planes purchased should be the...
Dodson Inc. is considering purchasing some new processing equipment. The carbon steel alternative has been quoted...
Dodson Inc. is considering purchasing some new processing equipment. The carbon steel alternative has been quoted at $40,000 initially. It would have an eight-year life with residual salvage of $2,000. The operating costs would be $3,000 per year with a major overhaul at the end of the third and sixth years of $4,000. A more corrosion-resistant alternative to stainless steel is offered at $60,000 with a life of 12 years, an operating expense of $1,500 per year, and no major...
On Jan. 1, 2019 Spitfire Airlines buys a new Boeing 737 aircraft for $ 50,500,000. It...
On Jan. 1, 2019 Spitfire Airlines buys a new Boeing 737 aircraft for $ 50,500,000. It is expected to last 15 years and fly 50,000 hours. At the end of its useful life, Spitfire expects to sell the aircraft for $2,700,000. In 2019 the aircraft flies for 3,750 hours. a. What is the 2019 depreciation, assuming straight line depreciation is used?   $____________________________ b. What is the 2019 depreciation, assuming units of production depreciation is used? $_______________________ c. Suppose that straight...
As a financial manager, you are considering purchasing a new machine that will cost $1 million....
As a financial manager, you are considering purchasing a new machine that will cost $1 million. It can be depreciated on a straight-line basis for five years to a zero salvage value. You expect revenues from the machine to be $700,000 each year and expenses are expected to be 50% of revenue. If the company is taxed at a rate of 34% and the appropriate discount rate for a project of this level of risk is 15%, will the company...
Your firm is considering a project that would require purchasing $7.9 million worth of new equipment....
Your firm is considering a project that would require purchasing $7.9 million worth of new equipment. Determine the present value of the depreciation tax shield associated with this equipment if the? firm's tax rate is 33%?, the appropriate cost of capital is 8 %?, and the equipment can be? depreciated: Please round all answers to 4 decimals. a.? Straight-line over a? ten-year period, with the first deduction starting in one year. b.? Straight-line over a? five-year period, with the first...
Suppose Proctor? & Gamble? (P&G) is considering purchasing $14 million in new manufacturing equipment. If it...
Suppose Proctor? & Gamble? (P&G) is considering purchasing $14 million in new manufacturing equipment. If it purchases the? equipment, it will depreciate it for tax purposes on a? straight-line basis over five? years, after which the equipment will be worthless. It will also be responsible for maintenance expenses of $1.00 million per? year, paid in each of years 1 through 5. It can also lease the equipment under a true tax lease for $3.4 million per year for the five?...
Your firm is considering a project that would require purchasing $7.3 million worth of new equipment....
Your firm is considering a project that would require purchasing $7.3 million worth of new equipment. Determine the present value of the depreciation tax shield associated with this equipment if the firm's tax rate is 33%, the appropriate cost of capital is 7%, and the equipment can be depreciated: a. Straight-line over a ten-year period, with the first deduction starting in one year. b. Straight-line over a five-year period, with the first deduction starting in one year. c. Using MACRS...
Your firm is considering a project that would require purchasing $7.5 million worth of new equipment....
Your firm is considering a project that would require purchasing $7.5 million worth of new equipment. Determine the present value of the depreciation tax shield associated with this equipment if the​ firm's tax rate is 20% using the alternative depreciation methods below. Note that because the depreciation tax shield is essentially a riskless cash flow​ (assuming the​ firm's tax rate remains​ constant), the appropriate cost of capital to evaluate the benefit from accelerated depreciation is the​ risk-free rate; assume this...
ADVERTISEMENT
Subjects
ADVERTISEMENT
Latest Questions
ADVERTISEMENT