Question

Rooney Airline Company is considering expanding its territory. The company has the opportunity to purchase one of two different used airplanes. The first airplane is expected to cost $22,230,000; it will enable the company to increase its annual cash inflow by $5,700,000 per year. The plane is expected to have a useful life of five years and no salvage value. The second plane costs 40,500,000; it will enable the company to increase annual cash flow by $8,100,000 per year. This plane has an eight-year useful life and a zero salvage value. Required a. Determine the payback period for each investment alternative and identify the alternative Rooney should accept if the decision is based on the payback approach. (Round your answers to 1 decimal place.) Payback Period years years a-1. Alternative 1 (First plane) Alternative 2 (Second plane) a-2. Rooney should accept

Answer 1

a1. Payback period = Initial investment / annual cash inflow

Alternative 1 = 22230000 / 5700000 = 3.9 years

Alternative 2 = 40500000 / 8100000 = 5 years

Rooney should accept Alternative 2.