You are contemplating the purchase of a one-half interest in a corporate airplane to facilitate the expansion of your business into two new geographic areas. The acquisition would eliminate about $220,000 in estimated annual expenditures for commercial flights, mileage reimbursements, rental cars, and hotels for each of the next 10 years. The total purchase price for the half-share is $6 million, plus associated annual operating costs of $100,000. Assume the plane can be fully depreciated on a straight-line basis for tax purposes over 10 years. The company’s weighted average cost of capital (commonly referred to as WACC) is 8%, and its corporate tax rate is 40%. Does this endeavor present a positive or negative net present value (NPV)? If positive, how much value is being created for the company through the purchase of this asset? If negative, what additional annual cash flows would be needed for the NPV to equal zero? To what phenomena might those additional positive cash flows be ascribable?

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
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You are contemplating the purchase of a one-half interest in a corporate airplane to

facilitate the expansion of your business into two new geographic areas. The acquisition

would eliminate about $220,000 in estimated annual expenditures for commercial flights,

mileage reimbursements, rental cars, and hotels for each of the next 10 years. The total

purchase price for the half-share is $6 million, plus associated annual operating costs of

$100,000. Assume the plane can be fully depreciated on a straight-line basis for tax

purposes over 10 years. The company’s weighted average cost of capital (commonly

referred to as WACC) is 8%, and its corporate tax rate is 40%. Does this endeavor

present a positive or negative net present value (NPV)? If positive, how much value is

being created for the company through the purchase of this asset? If negative, what

additional annual cash flows would be needed for the NPV to equal zero? To what

phenomena might those additional positive cash flows be ascribable?

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