Question

In: Economics

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

MARR = 18% , Tax = 38%, Interest on loan = 9%

Salvage value = 15% of original value

MACRS rate used

Year 1 2 3 4 5 6 7 8
Rate 0.1429 0.2449 0.1749 0.1249 0.0893 0.0892 0.0893 0.0446

using excel

Year Initial cost Loan payment Annual revenue Annual O&M cost Depreciation Salvage value Taxable Income Tax ATCF Discount factor Present value
0 -3500000 -3500000 1.00000 -3500000.00
1 -2835000 40000000 -30000000 5001500 2163500 822130 6342870 0.84746 5375313.56
2 -2835000 40000000 -30000000 8571500 -1406500 -534470 7699470 0.71818 5529639.47
3 -2835000 40000000 -30000000 6121500 1043500 396530 6768470 0.60863 4119499.80
4 -2835000 40000000 -30000000 4371500 2793500 1061530 6103470 0.51579 3148101.93
5 -2835000 40000000 -30000000 3125500 4039500 1535010 5629990 0.43711 2460920.52
6 -2835000 40000000 -30000000 3122000 4043000 1536340 5628660 0.37043 2085033.19
7 -2835000 40000000 -30000000 3125500 4039500 1535010 5629990 0.31393 1767394.80
8 -2835000 40000000 -30000000 1561000 5604000 2129520 5035480 0.26604 1339629.85
9 -2835000 40000000 -30000000 7165000 2722700 4442300 0.22546 1001543.50
10 -34335000 40000000 -30000000 -24335000 -9247300 -15087700 0.19106 -2882723.36
11 40000000 -30000000 10000000 3800000 6200000 0.16192 1003898.05
12 40000000 -30000000 10000000 3800000 6200000 0.13722 850761.06
13 40000000 -30000000 10000000 3800000 6200000 0.11629 720983.95
14 40000000 -30000000 10000000 3800000 6200000 0.09855 611003.34
15 40000000 -30000000 5250000 15250000 5795000 9455000 0.08352 789644.15
NPV 24,420,643.81

NPV = 24,420,644 is positive so project must be selected

Showing formula in excel

Year Initial cost Loan payment Annual revenue Annual O&M cost Depreciation Salvage value Taxable Income Tax ATCF Discount factor Present value
0 =-35000000*0.1 =B3 =1/(1+0.18)^A3 =J3*K3
1 =-(35000000-3500000)*0.09 40000000 -30000000 =0.1429*35000000 =D4+E4-F4+C4+G4 =H4*0.38 =H4-I4+F4 =1/(1+0.18)^A4 =J4*K4
2 =-(35000000-3500000)*0.09 40000000 -30000000 =0.2449*35000000 =D5+E5-F5+C5+G5 =H5*0.38 =H5-I5+F5 =1/(1+0.18)^A5 =J5*K5
3 =-(35000000-3500000)*0.09 40000000 -30000000 =0.1749*35000000 =D6+E6-F6+C6+G6 =H6*0.38 =H6-I6+F6 =1/(1+0.18)^A6 =J6*K6
4 =-(35000000-3500000)*0.09 40000000 -30000000 =0.1249*35000000 =D7+E7-F7+C7+G7 =H7*0.38 =H7-I7+F7 =1/(1+0.18)^A7 =J7*K7
5 =-(35000000-3500000)*0.09 40000000 -30000000 =0.0893*35000000 =D8+E8-F8+C8+G8 =H8*0.38 =H8-I8+F8 =1/(1+0.18)^A8 =J8*K8
6 =-(35000000-3500000)*0.09 40000000 -30000000 =0.0892*35000000 =D9+E9-F9+C9+G9 =H9*0.38 =H9-I9+F9 =1/(1+0.18)^A9 =J9*K9
7 =-(35000000-3500000)*0.09 40000000 -30000000 =0.0893*35000000 =D10+E10-F10+C10+G10 =H10*0.38 =H10-I10+F10 =1/(1+0.18)^A10 =J10*K10
8 =-(35000000-3500000)*0.09 40000000 -30000000 =0.0446*35000000 =D11+E11-F11+C11+G11 =H11*0.38 =H11-I11+F11 =1/(1+0.18)^A11 =J11*K11
9 =-(35000000-3500000)*0.09 40000000 -30000000 =D12+E12-F12+C12+G12 =H12*0.38 =H12-I12+F12 =1/(1+0.18)^A12 =J12*K12
10 =-(35000000-3500000)*0.09+(-31500000) 40000000 -30000000 =D13+E13-F13+C13+G13 =H13*0.38 =H13-I13+F13 =1/(1+0.18)^A13 =J13*K13
11 40000000 -30000000 =D14+E14-F14+C14+G14 =H14*0.38 =H14-I14+F14 =1/(1+0.18)^A14 =J14*K14
12 40000000 -30000000 =D15+E15-F15+C15+G15 =H15*0.38 =H15-I15+F15 =1/(1+0.18)^A15 =J15*K15
13 40000000 -30000000 =D16+E16-F16+C16+G16 =H16*0.38 =H16-I16+F16 =1/(1+0.18)^A16 =J16*K16
14 40000000 -30000000 =D17+E17-F17+C17+G17 =H17*0.38 =H17-I17+F17 =1/(1+0.18)^A17 =J17*K17
15 40000000 -30000000 =0.15*35000000 =D18+E18-F18+C18+G18 =H18*0.38 =H18-I18+F18 =1/(1+0.18)^A18 =J18*K18
NPV =SUM(L3:L18)

Rahul Sunny answered 1 year ago
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