Question

Problem 12-16
Unequal Lives

Shao Airlines is considering two alternative planes. Plane A has an expected life of 5 years, will cost $100 million and will produce net cash flows of $30 million per year. Plane B has a life of 10 years, will cost $132 million and will produce net cash flows of $27 million per year. Shao plans to serve the route for only 10 years. Inflation in operating costs, airplane costs, and fares is expected to be zero, and the company's cost of capital is 11%.

1. By how much would the value of the company increase if it accepted the better project (plane)? Enter your answer in millions. For example, an answer of $1.2 million should be entered as 1.2, not 1,200,000. Round your answer to two decimal places.
   $ __________________million

2. What is the equivalent annual annuity for each plane? Enter your answer in millions. For example, an answer of $1.2 million should be entered as 1.2, not 1,200,000. Round your answers to two decimal places.

   Plane A	$ _________ million
   Plane B	$ _____________ million

Answer 1

a: Value will increase by $27.01 million

b: EAA: Plane A = $2.94 million

Plane B= $4.59 million

working

Year	Plane A	Plane B
0	-100	-132
1	30	27
2	30	27
3	30	27
4	30	27
5	-70	27
6	30	27
7	30	27
8	30	27
9	30	27
10	30	27
NPV	17.33	27.01
EAA	$2.94	$4.59