Walton 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 $17,360,000; it will enable the company to increase its annual cash inflow by $5,600,000 per year. The plane is expected to have a useful life of five years and no salvage value. The second plane costs $33,320,000; it will enable the company to increase annual cash flow by $9,800,000 per year. This plane has an eight-year useful life and a zero salvage value. Required a1. Determine the payback period for each investment alternative. a2. Identify the alternative Walton should accept if the decision is based on the payback approach. Note: Round your answers to 1 decimal place. a-1. Alternative 1 (First plane) a-1. Allemative 2 (Second plane) a-2. Walton should accept Payback Period years years

Walton 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 $17,360,000; it will enable the company to increase its annual cash inflow by $5,600,000 per year. The plane is expected to have a useful life of five years and no salvage value. The second plane costs $33,320,000; it will enable the company to increase annual cash flow by $9,800,000 per year. This plane has an eight-year useful life and a zero salvage value. Required a1. Determine the payback period for each investment alternative. a2. Identify the alternative Walton should accept if the decision is based on the payback approach. Note: Round your answers to 1 decimal place. a-1. Alternative 1 (First plane) a-1. Allemative 2 (Second plane) a-2. Walton should accept Payback Period years years

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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A firm is considering an investment in a new machine with a price of $15.9 million to replace its existing machine. The current machine has a book value of $5.7 million and a market value of $4.4 million. The new machine is expected to have a 4-year life, and the old machine has four years left in which it can be used. If the firm replaces the old machine with the new machine, it expects to save $6.45 million in operating costs each year over the next four years. Both machines will have no salvage value in four years. If the firm purchases the new machine, it will also need an investment of $280,000 in net working capital. The required return on the investment is 11 percent and the tax rate is 23 percent. The company uses straight-line depreciation. a)- What is the NPV of the decision to purchase the new machine? b) What is the IRR of the decision to purchase the new machine? c) WHat is the NPV of the decison to keep using the old machine? d) What is the IRR of the decison to keep…
Scription Inc. has additional cash available for investment and considers replacing the old factory equipment with a new one. There are two options for Scription. One option is to purchase a new equipment from Supplier A for $100,000. Supplier A equipment has a useful life of 10 years with after-tax residual value, $5,000 and can save $60,000 annually. The other option is with Supplier B. Supplier B would charge $120,000 for a new equipment. Supplier B equipment would generate $50,000 annual cost saving. Its useful life is 12 years and the after-tax residual value of $6,000. Assume the required rate of return for both options is 8%. Using NPV method, determine which option is the more attractive. Must show your computation steps. Use the appropriate tables in Appendix A to obtain the relevant present value factor and round up your final answer to the nearest dollar.
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