Question

I want solve it, by this way

first cost , annual cost, salvage value , and i%

law : AW

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 value at the end of its service life would be $10,000,000. AirExpress's CFO has recently proposed to replace the old plane with a modern Boeing 777 plane that is expected to last for 15 years. The new plane will cost $75,000,000, will provide $3,000,000 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 its current fair market value, which is $8,000,000. The CFO estimates that if the old plane is kept for 5 more years, its salvage value will be $4,000,000. If AirExpress's MARR is 8% 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.

Answer 1

1. Depreciation is non cash item and tax rate is not given. hence ignored

2. Initial investment is considered after reducing realization of 800000 from sale of old flight

3. Cash flow of 5th year is after reducing salvage value of 4000000 of old flight

Saving in cost	3000000
Increase in revenue	5000000
Total	8000000
PV annuity factor @ 8% for 15 years	8.5595
PV of total Incremental benefits	68476000
salvage of new flight after 15 years	20000000
PVF @ 8% for 15 years	0.31524
PV of salvage	6304834
Less: salvage of old flight after 4 years	4000000
PVF @ 8% for 4 years	0.68058
PV of salvage	2722333
Initial investment (75000000-8000000)	67000000
NPV of replacement	5058501

	Cash flow	PVF	PV
-	67,000,000.00	(1.0000000)	(67,000,000.00)
1.00	8,000,000.00	0.9259259	7,407,407.41
2.00	8,000,000.00	0.8573388	6,858,710.56
3.00	8,000,000.00	0.7938322	6,350,657.93
4.00	8,000,000.00	0.7350299	5,880,238.82
5.00	4,000,000.00	0.6805832	2,722,332.79
6.00	8,000,000.00	0.6301696	5,041,357.02
7.00	8,000,000.00	0.5834904	4,667,923.16
8.00	8,000,000.00	0.5402689	4,322,151.08
9.00	8,000,000.00	0.5002490	4,001,991.74
10.00	8,000,000.00	0.4631935	3,705,547.90
11.00	8,000,000.00	0.4288829	3,431,062.87
12.00	8,000,000.00	0.3971138	3,176,910.07
13.00	8,000,000.00	0.3676979	2,941,583.40
14.00	8,000,000.00	0.3404610	2,723,688.33
15.00	28,000,000.00	0.3152417	8,826,767.74
Present value			5,058,330.81