Question

Based on your teams determination of the number of airplanes needed, ExpressJet is considering multiple options for acquiring the Embraer 170 airplanes at a price of $10.9 million each. The executives in charge of capital acquisitions at ExpressJet are relying on you to show and explain which option will place the company in the best financial position based on your Net Present Value calculations. In the past, all acquisitions have been in cash. However with the current trend of the company, the options being considered are as follows:

Calculate Net Present Value for all the scenarios as compared to a cash purchase. Use the below data to fill in the spreadsheet.

Cost of new equipment $10,900,000

Expected life of equipment in years 30

Disposal Value in 5 years $1,090,000

Lifetime miles per plane 1,575,000,000

Annual miles per year 52,500,000

Number of workers needed 3

Annual hours to be worked per employee 2,000

Earnings per hour for employees $35

Annual health benefits per employee $2,000

Other annual benefits per employee -% of wages 15%

Cost per passenger seat mile $0.06

Other variable costs per seat mile $0.10

Cost to purchase cans-per can $0.50

Required rate of return 11%

Taxe Rate 35%

Monthly lease payments $95,000

Lease term 10 years

Monthly Note Payments ($203,208.91)

Note Term 5 years

Down Payment $1,000,000

Answer 1

Option - 1: 5 year note Vs Cash

option - 2 : lease VS cash