Question

Exercise 2 Private business jets produced by Smartair in Wichita KS cost an average of $4.2millions each. Smartair invested $650 million in 2007 and began taking orders 2 years later, in 2009. US corporations ordered a total of 500 jets in 2009, paying only 15% of the cost of the jet as a downpayment at the time of ordering. The rest was agreed to be paid at the moment of delivery. Due to limited production capacity, Smartair started delivering jets in 2012; a total of 100 jets were delivered per year for each of the next five years, from 2012 to 2016. If Smartair's operating costs averaged $40 million for each of the 10 years, what rate of return the company made over the 10-year planning period?

Answer 1

Net cash flow, 2007 ($ Million) = - 650

Net cash flow, 2008 ($ Million) = - 40 (Operating cost)

Down-payment per Jet in 2009 ($ Million) = 4.2 x 15% = 0.63

Total down-payment (Income) in 2009 ($ Million) = 0.63 x 500 = 315

Net cash flow, 2009 ($ Million) = Total down-payment (Income) - Operating cost = 315 - 40 = 275

Net cash flow, 2010-11 ($ Million) = - 40 (Operating cost)

Revenue per Jet, 2012-16 ($ Million) = 4.2 x 85% = 3.57

Total Revenue, 2012-16 ($ Million) = 100 x 3.57 = 357

Net cash flow, 2012-16 ($ Million) = Total revenue - Operating cost = 357 - 40 = 317

Rate of Return (ROR) for Net cash flow iscomputed using Excel IRR function, as follows.

Year	Net Cash Flow ($ Million)
2007	-650
2008	-40
2009	315
2010	-40
2011	-40
2012	317
2013	317
2014	317
2015	317
2016	317
ROR =	18.28%