Question

engineering economic

solve step by step clearly with explain why

AirExpress bought a used Boeing 757 plane 5 years ago for $35,000,000. At the time the plane was bought, it was estimated that it would have a service life of 10 years and its salvage valuc at the end of its service life would be S10,000,000. AirExpress's CFO has recently proposed to replace the old plane with a modern Bocing 777 plane that is expected to last for 15 years. The new plane will cost $75,000,000, will provide S3,000,000 savings in operating and maintenance costs, will increase revenues by $5,000,000, and will have $20,000,000 salvage value (after 15 years). The seller of the new plane is willing to trade in the old plane for it market value, which is $8,000,000. The CFO estimatestha f the old plane is kept for 5 more years, its salvage value will be $4,000,000. If AirExpress's MARR is 10% per year, what would you advise the company to do-keep the old plane or replace it with the new plane? Solve the problem using replacement analysis. s current fair

Answer 1

Answer-

3)

1.

Depreciation is a non cash expenditure, and there is no information regarding tax rate henec tax shield to be arisen on depreciation in this case has not considered .So depreciation cost has been considered as irrelevant for the decision making in the case.

2.

Initial out flow for new plan has been computed after considering the realization to be arisen from the sale proceeds of old plan

3. NPV of the Replacement

Particulars Saving in Operating and Maintenance Cost Amount 30,00,000 Increase in Revenue 50,00,000 Total Increment In Revenue per annum 80,00,000 Cumulative Discounting Factor for 15 years @ 10% Total Present Value of Benefits during the life of Air (80000000*7.606) 7.606 6,08,48,000 Less: Initial Out flow (75000000-8000000 6,70,00,000.0 Net Present Value -6152000

Suggestion: Since NPV of replacement option is negative hence the plan should not be replaced with new one.