Question
In: Accounting
Adams Airline Company is considering expanding its territory. The company has the opportunity to purchase one...
Adams Airline Company is considering expanding its territory. The company has the opportunity to purchase one of two different used airplanes. The first airplane is expected to cost $14,790,000; it will enable the company to increase its annual cash inflow by $5,100,000 per year. The plane is expected to have a useful life of five years and no salvage value. The second plane costs $34,400,000; it will enable the company to increase annual cash flow by $8,600,000 per year. This plane has an eight-year useful life and a zero salvage value. Required Determine the payback period for each investment alternative and identify the alternative Adams should accept if the decision is based on the payback approach. (Round your answers to 1 decimal place.)
Solutions
Expert Solution
| 1 | Payback period | |||||||
| Location | 1st Plane | 2nd Plane | ||||||
| Net inflows/outflows | Cumulativa cash inflows | Net inflows/outflows | Cumulativa cash inflows | |||||
| year0 | -1,47,90,000 | -3,44,00,000 | ||||||
| year 1 | 51,00,000 | 51,00,000 | 86,00,000 | 86,00,000 | ||||
| year 2 | 51,00,000 | 1,02,00,000 | 86,00,000 | 1,72,00,000 | ||||
| year 3 | 51,00,000 | 1,53,00,000 | 86,00,000 | 2,58,00,000 | ||||
| year 4 | 51,00,000 | 2,04,00,000 | 86,00,000 | 3,44,00,000 | ||||
| year 5 | 51,00,000 | 2,55,00,000 | 86,00,000 | 4,30,00,000 | ||||
| year 6 | 86,00,000 | 5,16,00,000 | ||||||
| year 7 | 86,00,000 | 6,02,00,000 | ||||||
| year 8 | 86,00,000 | 6,88,00,000 | ||||||
| a | 1st plane payback period | |||||||
| In the 3rd year airline company received its intial investment of USD 14790000 | ||||||||
| There for exact cash payback period would be between year 2 and year 3 | ||||||||
| Payback period = | 2 years + (initial outlfows -year 2 cumulative inflow/year 3 inflows | |||||||
| = | 2 years+ (14790000-10200000)/5100000 years | |||||||
| = | 2 years+ (4590000/5100000) years | |||||||
| 2years +0.90 years | ||||||||
| Payback period = | 2.90 years | |||||||
| 2nd plane payback period | ||||||||
| In the 4th year airline company received its intial investment of USD 34400000 | ||||||||
| Payback period = | 4 years | |||||||
| Since the payback period of alternative 1 is airplan is shorter, alternative 1 should be accepted based on the payback mehod | ||||||||
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