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hat is the optimal time that CAL should keep the airplane flying?

hat is the optimal time that CAL should keep the airplane flying?

Essentials Of Investments
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Caribbean Airlines (CAL) is planning to acquire a plane for $50 million. The tax rate of CAL is 30% and its cost of capital 10%. They will depreciate it completely on a straight-line basis with a lifespan of 5 years. The plane estimate pretax annual income is $20 million (not including maintenance costs). The resale value and the annual maintenance cost (in millions) of the plane are variable as shown in the following table: Time 0 year 1 year 2 year 3 year Maintenance $0 $5 million $8 million $10 million $12 million $15 million Resale value $50 million $45 million $40 million $35 million 4 year 5 year What is the optimal time that CAL should keep the airplane flying? O a. Optimal 2 years O b. Optimal 3 years O c. Optimal 4 years O d. Optimal 5 years $30 million $25 million
Transcribed Image Text:Caribbean Airlines (CAL) is planning to acquire a plane for $50 million. The tax rate of CAL is 30% and its cost of capital 10%. They will depreciate it completely on a straight-line basis with a lifespan of 5 years. The plane estimate pretax annual income is $20 million (not including maintenance costs). The resale value and the annual maintenance cost (in millions) of the plane are variable as shown in the following table: Time 0 year 1 year 2 year 3 year Maintenance $0 $5 million $8 million $10 million $12 million $15 million Resale value $50 million $45 million $40 million $35 million 4 year 5 year What is the optimal time that CAL should keep the airplane flying? O a. Optimal 2 years O b. Optimal 3 years O c. Optimal 4 years O d. Optimal 5 years $30 million $25 million
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