Question

In a story on National Public Radio's show Morning Report ("Airlines Use New Tech to Fight High Fuel Costs," Monday, March 14, 2005), reporter Scott Horsley described wingtip modifications that were being made to Boeing 737 aircraft by a firm called Aviation Partners Inc, as part of a joint venture with Boeing. By adding vertical “winglets” to the wingtips of the airplanes, drag was reduced and consequently approximately 100,000 gallons of jet fuel could be saved annually per aircraft. The cost of retrofitting these modifications was approximately $700,000 per airplane.

Answer 1

(I) Let breakeven price be C per unit.

100,000 x C = $700,000 / P/A(12%, 10)

C = $7 / 5.6502

C = $1.24

(II) If C = $3.50,

PV ($) = - 700,000 + 100,000 x 3.5 x P/A(12%, 10)

= - 700,000 + 350,000 x 5.6502

= - 700,000 + 1,977,570

= 1,277,570