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A new type of commuter airplane is being manufactured for private use requires an initial investment...

  • A new type of commuter airplane is being manufactured for private use requires an initial investment of $4,500,000 that will be depreciated straight-line to zero over 8 years.
  • The price of the plane will be $25,000 and the variable costs are $17,500 per plane.
  • The fixed costs are $850,000.
  • Using the financial BE methodology which delivers NPV = $0, what is the BE operating cash flow needed if the required return = 10%?

Solutions

Expert Solution

Price of the plane, Variable cost, fixed cost & depreciation are same for all the 8 years, hence Operating cashflow also same for all the 8 years.

Breakeven operating cashflow = Initial Investment / Present value annuity factor @ 10% for 8 years

Year PVF
1           0.9091
2           0.8264
3           0.7513
4           0.6830
5           0.6209
6           0.5645
7           0.5132
8           0.4665
PVAF          5.3349

Breakeven operating cashflow per year = $4,500,000/5.3349 = $843,498 or $843,500

jeff jeffy answered 1 year ago
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