The president's executive jet is not fully utilized. You judge that its use by other officers would increase direct operating costs by only $37,000 a year and would save $100,000 a year in airline bills. On the other hand, you believe that with the increased use the company will need to replace the jet at the end of three years rather than four. A new jet costs $1.27 million and (at its current low rate of use) has a life of Five years. Assume that the company does not pay taxes. All cash flows are forecasted in real terms. The real opportunity cost of capital is 10%. a. Calculate the equivalent annual cost of a new jet. Note: Do not round intermediate calculations. Enter your answer in dollars not in millions. Round your answer to 2 decimal places. Enter your answer as a positive value. b. Calculate the present value of the additional cost of replacing the jet one year earlier than under its current usage. Note: Do not round intermediate calculations. Enter your answer in dollars not in millions. Round your answer to 2 decimal places.Enter your answer as a positive value. c. Calculate the present value of the savings. Note: Do not round intermediate calculations. Enter your answer in dollars not in millions. Round your answer to 2 decimal places. d. Should you try to persuade the president to allow other officers to use the plane? a. Equivalent annual cost b. Present value of the savings c. Present value of the savings d. Should you try to persuade the president to allow other officers to use the plane? I
The president's executive jet is not fully utilized. You judge that its use by other officers would increase direct operating costs by only $37,000 a year and would save $100,000 a year in airline bills. On the other hand, you believe that with the increased use the company will need to replace the jet at the end of three years rather than four. A new jet costs $1.27 million and (at its current low rate of use) has a life of Five years. Assume that the company does not pay taxes. All cash flows are forecasted in real terms. The real opportunity cost of capital is 10%. a. Calculate the equivalent annual cost of a new jet. Note: Do not round intermediate calculations. Enter your answer in dollars not in millions. Round your answer to 2 decimal places. Enter your answer as a positive value. b. Calculate the present value of the additional cost of replacing the jet one year earlier than under its current usage. Note: Do not round intermediate calculations. Enter your answer in dollars not in millions. Round your answer to 2 decimal places.Enter your answer as a positive value. c. Calculate the present value of the savings. Note: Do not round intermediate calculations. Enter your answer in dollars not in millions. Round your answer to 2 decimal places. d. Should you try to persuade the president to allow other officers to use the plane? a. Equivalent annual cost b. Present value of the savings c. Present value of the savings d. Should you try to persuade the president to allow other officers to use the plane? I
Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
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Question
Transcribed Image Text:The president's executive jet is not fully utilized. You judge that its use by other officers would increase direct operating costs by only
$37,000 a year and would save $100,000 a year in airline bills. On the other hand, you believe that with the increased use the
company will need to replace the jet at the end of three years rather than four. A new jet costs $1.27 million and (at its current low rate
of use) has a life of Five years. Assume that the company does not pay taxes. All cash flows are forecasted in real terms. The real
opportunity cost of capital is 10%.
a. Calculate the equivalent annual cost of a new jet.
Note: Do not round intermediate calculations. Enter your answer in dollars not in millions. Round your answer to 2 decimal
places. Enter your answer as a positive value.
b. Calculate the present value of the additional cost of replacing the jet one year earlier than under its current usage.
Note: Do not round intermediate calculations. Enter your answer in dollars not in millions. Round your answer to 2 decimal
places.Enter your answer as a positive value.
c. Calculate the present value of the savings.
Note: Do not round intermediate calculations. Enter your answer in dollars not in millions. Round your answer to 2 decimal
places.
d. Should you try to persuade the president to allow other officers to use the plane?
a. Equivalent annual cost
b. Present value of the savings
c. Present value of the savings
d. Should you try to persuade the president to allow other officers to use the plane?
I
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