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?
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
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
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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