Question

1. Capital Budgeting

Apache Airlines is looking to buy some gates at a West Coast airport. The key financial variables are below. Note that the gates revert back to the airport at the end of year 10.

Purchase price - $25M                                Gate renovation (fit-out costs) - $11M (year 2 and in year 6)

Yearly revenue - $12M                                Revenue inflator - 2.8%

Operating costs - 40% of revenue

Discount rate - 10%                                       Tax rate - 21%

D D X AutoSum" AY O Times New Ro V 12 VAA BIU - - A === = a Wrap Text 3 Merge & Center - General $ - % Paste , 8 Insert Delete Format Conditional Format as Cell Formatting Table Styles Styles Clear Sort & Find & Filter - Select Editing Clipboard Font Alignment Number Cells E for Apache Gate Purchase B A C D E F Apache Gate Purchase G H I J K A 1 2 Purchase price 3 Fit-out costs 4 Yearly revenue 5 Revenue inflator 6 Operating costs (% of revenue) 7 Discount rate Tax rate 10 11 2 3 4 Year's 5 6 7 8 9 10 12 Investment 13 Revenues 14 Expenses 15 Income before tax 16 Taxes 17 Net income after tax | 18 NPV 19 IRR 26. Prob. 1 Prob. 2 Prob. 3 Prob. 4 Prob. 5 . + | J -— + 130% O Type here to search OB I 07:24 01/14/2020 e C F

Answer 1

Apache Gate Purchase
Purchase price	$ 25 M
Fit-out costs	$ 11M
Yearly Revenue	$ 12M
Revenue Inflator	2.8%
Operating costs (% of revenue)	40%
Discount Rate	10%
Tax Rate	21%
	YEARS ($ in Millions)
	1	2	3	4	5	6	7	8	9	10
Investments	$25M	$11M				$11M
Revenues	$12M	$12.36	$12.68	$13.04	$13.40	$13.78	$14.16	$14.56	$14.96	$15.38
Expenses	$4.8	$4.94	$5.07	$5.22	$5.36	$5.51	$5.66	$5.82	$5.98	$6.15
Income before taxes	$7.2	$7.42	$7.61	$7.82	8.04	$8.27	$8.50	$8.74	$8.98	$9.23
Tax@21%	$1.51	$1.56	$1.60	$1.64	$1.69	$1.74	$1.78	$1.83	$1.88	$1.94
Net Income after Tax	$5.69	$5.86	$6.01	$6.18	$6.35	$6.53	$6.72	$6.91	$7.10	$7.29
NPV@10%	$5.17	$4.84	$4.51	$4.22	$3.94	$3.69	$3.45	$3.22	$3.01	$2.81
NPV Total	$38.86
IRR	$1.44		=p.v of outflows - p.v of inflows
			=$25+$9.09+$6.21-38.86