Question

anyone know ?

3. 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 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.

Answer 1

cost of new plane		-75000000		cost of old plane		35000000
sale of old equipment		8000000		accumulated depreciation	2500000*5	12500000
incremental cash outflow		-67000000		book value at the end of year 5		22500000
				sale value of old plane		8000000
Incremental annual savings				loss on sale of old machine		14500000
saving from operating cost	3000000
savings from increase in revenue	5000000			annual depreciation on old equipment	(35000000-10000000)/10	2500000
Incremental annual savings year 1- year 14	8000000			annual depreciation on new equipment	(75000000-20000000)/15	3666666.7
incremental cash flow in year 15	28000000			incremental revenue		1166666.7
Year	incremental cash flow	present value factor at 10% =1/(1+r)^n r =10%	present value of cash flow = incremental cash flow*present value factor
0	-67000000	1	-67000000
1	8000000	0.909090909	7272727.27
2	8000000	0.826446281	6611570.25
3	8000000	0.751314801	6010518.41
4	8000000	0.683013455	5464107.64
5	8000000	0.620921323	4967370.58
6	8000000	0.56447393	4515791.44
7	8000000	0.513158118	4105264.95
8	8000000	0.46650738	3732059.04
9	8000000	0.424097618	3392780.95
10	8000000	0.385543289	3084346.32
11	8000000	0.350493899	2803951.2
12	8000000	0.318630818	2549046.54
13	8000000	0.28966438	2317315.04
14	8000000	0.263331254	2106650.03
15	28000000	0.239392049	6702977.38
Net present value =sum of present value of cash flow			-1363523
no plane should not be replaced as it results In negative NPV
Note: As there is no tax rate given so incremental depreciation would not be considered for calcualtions of incremental operating cash flow