Question

Rini Airlines is considering two alternative planes. Plane A has an expected life of 5 years, will cost $95 million, and will produce after-tax cash flows of $35 million per year. Plane B has a life of 10 years, will cost $112 million, and will produce after-tax cash flows of $25 million per year. Rini plans to serve the route for 10 years. The company's WACC is 9%. If Rini needs to purchase a new Plane A, the cost will be $105 million, but cash inflows will remain the same. Should Rini acquire Plane A or Plane B? Explain your answer. Show a timeline with the after-tax cash flows for each option and calculate the NPV for each plane. Which plane would you recommend and why?

Answer 1

PLARO-A t net Cash Flows Plan-A -as -95 35 35 35 35 35 PLAN hat help fateral ne Fresh Plant Plan-B Flow @9% Tev ler -112 1 -95 -112 25 0.9174 32.11 22.94 25 0.8417 29.46 2004 25 0.7722 27-03 1903 25 0.7084 24.8 17.71 0.650 - 45.5 16.25 0.5963 20.87 14.91 25 0.547 19.15 1368 25 0.502 17.57 1255 25 0.4604 16.11 1151 25 0.4224 14.784 10.56 NPV 1.384 48.45 35 -los 35 25 35 7 35 35 35 8 35 35 35 9 10 35 project and will increase Plan by A is better $ 12.934 the value