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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 1 month ago
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