Question

Shao Airlines is considering two alternative lanes. 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 $25 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 12%. By how much would the value of the company increase if it accepted the better project (plane)?

What is the equivalent annual annuity for each plane?

	A.	Project B is the better project and will increase the company’s value by $12.764 million. Project A EAA = $1.638 million Project B EAA = $2.259 million
	B.	Project A is the better project and will increase the company’s value by $12.764 million. Project A EAA = $2.259 million Project B EAA = $1.638 million
	C.	Project A is the better project and will increase the company’s value by $12.764 million. Project A EAA = $1.638 million Project B EAA = $2.259 million
	D.	Project B is the better project and will increase the company’s value by $12.764 million. Project A EAA = $2.259 million Project B EAA = $1.638 million

Answer 1