Net Present Value , Uncertainty Ondi Airlines is interested in acquiring a new aircraft to service a new route. The route will be from Tulsa to Denver. The aircraft will fly one round-trip daily except for scheduled maintenance days. There are 15 maintenance days scheduled each year. The seating capacity of the aircraft is 150. Flights are expected to be fully booked. The average revenue per passenger per flight (one-way) is $235. Annual operating costs of the aircraft follow: The aircraft will cost $120,000,000 and has an expected life of 20 years. The company requires a 12% return. Assume there are no income taxes. Required: 1. Calculate the NPV for the aircraft. Should the company buy it? 2. In discussing the proposal, the marketing manager for the airline believes that the assumption of 100% booking is unrealistic. He believes that the booking rate will be somewhere between 70 and 90%, with the most likely rate being 80%. Recalculate the NPV by using an 80% seating capacity. Should the aircraft be purchased? 3. Calculate the average seating rate that would be needed so that NPV will equal zero. Round the seating rate to the nearest percent. 4. CONCEPTUAL CONNECTION Suppose that the price per passenger could be increased by 10% without any effect on demand. What is the average seating rate now needed to achieve an NPV equal to zero? What would you now recommend? Round the seating rate to the nearest percent.

Question

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Answer 1

Textbook Question

Chapter 12, Problem 44P

Net Present Value, Uncertainty

Ondi Airlines is interested in acquiring a new aircraft to service a new route. The route will be from Tulsa to Denver. The aircraft will fly one round-trip daily except for scheduled maintenance days. There are 15 maintenance days scheduled each year. The seating capacity of the aircraft is 150. Flights are expected to be fully booked. The average revenue per passenger per flight (one-way) is $235. Annual operating costs of the aircraft follow:

Chapter 12, Problem 44P, Net Present Value, Uncertainty Ondi Airlines is interested in acquiring a new aircraft to service a

The aircraft will cost $120,000,000 and has an expected life of 20 years. The company requires a 12% return. Assume there are no income taxes.

Required:

1. Calculate the NPV for the aircraft. Should the company buy it?
2. In discussing the proposal, the marketing manager for the airline believes that the assumption of 100% booking is unrealistic. He believes that the booking rate will be somewhere between 70 and 90%, with the most likely rate being 80%. Recalculate the NPV by using an 80% seating capacity. Should the aircraft be purchased?
3. Calculate the average seating rate that would be needed so that NPV will equal zero. Round the seating rate to the nearest percent.
4. CONCEPTUAL CONNECTION Suppose that the price per passenger could be increased by 10% without any effect on demand. What is the average seating rate now needed to achieve an NPV equal to zero? What would you now recommend? Round the seating rate to the nearest percent.

1.

Expert Solution

To determine

Find out the NPV of the aircraft. Also, recommend that the company should buy it or not.

Explanation of Solution

Net Present Value:

The remaining balance of the present value of a project’s inflows and outflows is known as net present value (NPV). It is a discounting model of capital investment decision. A project with a positive NPV increases the wealth of a firm whereas a project with a negative NPV decreases the wealth of a firm.

Use the following formula to calculate NPV of the investment:

NPV=Present value of cash inflow(P)−Present value of cash outflow(I)

Substitute $160,032,752¹ for P and $120,000,000 for I in the above formula.

NPV=$160,032,752−$120,000,000=$40,032,752

Therefore, net present value of the investment is $40,032,752.

The company should buy the aircraft because NPV is positive.

Working Note:

1. Calculation of expected cash flow:

Calculation of days of operation:

Days of operation=Total days−Maintenance days=365 days−15 days=350 days

Calculation of revenue per year:

Revenue per year =Revenue per day×Days of operation=($235×2×150)×350=$70,500×350=$24,675,000

Calculation of annual cash flow:

Annual cash flow=Revenue per year−Total annual operating costs=24,675,000−3,250,000=21,425,000

Calculation of present value of future cash flow:

Present value of future cash flow=Future value×Discount factor=$21,425,000×7.46944=$40,032,752

2.

Expert Solution

To determine

Find out the NPV of the aircraft if the booking is 80% of seating capacity.

Explanation of Solution

Use the following formula to calculate NPV of the investment:

NPV=Present value of cash inflow(P)−Present value of cash outflow(I)

Substitute $123,171,066² for P and $120,000,000 for I in the above formula.

NPV=$123,171,066−$120,000,000=$3,171,066

Therefore, net present value of the investment is $3,171,066.

The company should buy the aircraft because NPV is positive.

Working Note:

2. Calculation of revised annual cash flow:

Annual cash flow=Revenue per year−Total annual operating costs=(24,675,000×80100)−3,250,000=19,740,000−3,250,000=$16,490,000

Calculation of present value of future cash flow:

Present value of future cash flow=Future value×Discount factor=$16,490,000×7.46944=$123,171,066

3.

Expert Solution

To determine

Calculate the seating rate at which NPV will equal zero.

Explanation of Solution

Calculate seating rate:

Use the following formula to calculate seats to be sold:

Seats to be sold=Revenue per dayRevenue per seat

Substitute $55,187³ for revenue per day and $470 for revenue per seat in the above formula.

Seats to be sold=$55,187$470=118 seats

Therefore, seats to be sold in each trip are 118 seats.

Calculate seating rate:

Use the following formula to calculate the seating rate:

Seating rate=Seats to be soldTotal seats

Substitute 118 seats for seats to be sold and 150 seats for total seats in the above formula.

Seating rate=118 seats150 seats=79%

Working Note:

3. Calculation of annual cash flow at which NPV equals 0:

Annual cash flow=Cost of the aircraftDiscount factor=$120,000,0007.46944=$16,065,461

Calculation of annual revenue:

Annual revenue=Annual cash flow+Total annual opertaing cost=$16,065,461+$3,250,000=$19,315,461

Calculation of revenue per day:

Revenue per day=Annual revenueOperation days=$19,315,461350=$55,187

4.

Expert Solution

To determine

Calculate the seating rate at which NPV will equal zero and the price per passenger is increased by 10%. Also state the recommendations.

Explanation of Solution

Use the following formula to calculate seats to be sold:

Seats to be sold=Revenue per dayRevenue per seat

Substitute $55,187³ for revenue per day and $517⁴ for revenue per seat in the above formula.

Seats to be sold=$55,187$517=107 seats

Therefore, seats to be sold in each trip are 107 seats.

Calculate seating rate:

Use the following formula to calculate the seating rate:

Seating rate=Seats to be soldTotal seats

Substitute 107 seats for seats to be sold and 150 seats for total seats in the above formula.

Seating rate=107 seats150 seats=71%

The seating will be between 70% and 90% of the total seating. There is a possibility that the actual seating rate can be lower than the estimated rate. The interval is of 20% and it is most likely that NPV remain positive.

These analyses are drafted with the assumption that all the factors are constant. However, the price of the factors can change during the course of the useful of the aircraft.

Working Note:

4. Calculation of round trip average price:

Round−trip average price=Price of round trip×1.1=(2×$235)×1.1=$470×1.1=$517

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Answer 2

Textbook Question

Chapter 12, Problem 44P

Net Present Value, Uncertainty

Ondi Airlines is interested in acquiring a new aircraft to service a new route. The route will be from Tulsa to Denver. The aircraft will fly one round-trip daily except for scheduled maintenance days. There are 15 maintenance days scheduled each year. The seating capacity of the aircraft is 150. Flights are expected to be fully booked. The average revenue per passenger per flight (one-way) is $235. Annual operating costs of the aircraft follow:

Chapter 12, Problem 44P, Net Present Value, Uncertainty Ondi Airlines is interested in acquiring a new aircraft to service a

The aircraft will cost $120,000,000 and has an expected life of 20 years. The company requires a 12% return. Assume there are no income taxes.

Required:

1. Calculate the NPV for the aircraft. Should the company buy it?
2. In discussing the proposal, the marketing manager for the airline believes that the assumption of 100% booking is unrealistic. He believes that the booking rate will be somewhere between 70 and 90%, with the most likely rate being 80%. Recalculate the NPV by using an 80% seating capacity. Should the aircraft be purchased?
3. Calculate the average seating rate that would be needed so that NPV will equal zero. Round the seating rate to the nearest percent.
4. CONCEPTUAL CONNECTION Suppose that the price per passenger could be increased by 10% without any effect on demand. What is the average seating rate now needed to achieve an NPV equal to zero? What would you now recommend? Round the seating rate to the nearest percent.

1.

Expert Solution

To determine

Find out the NPV of the aircraft. Also, recommend that the company should buy it or not.

Explanation of Solution

Net Present Value:

The remaining balance of the present value of a project’s inflows and outflows is known as net present value (NPV). It is a discounting model of capital investment decision. A project with a positive NPV increases the wealth of a firm whereas a project with a negative NPV decreases the wealth of a firm.

Use the following formula to calculate NPV of the investment:

NPV=Present value of cash inflow(P)−Present value of cash outflow(I)

Substitute $160,032,752¹ for P and $120,000,000 for I in the above formula.

NPV=$160,032,752−$120,000,000=$40,032,752

Therefore, net present value of the investment is $40,032,752.

The company should buy the aircraft because NPV is positive.

Working Note:

1. Calculation of expected cash flow:

Calculation of days of operation:

Days of operation=Total days−Maintenance days=365 days−15 days=350 days

Calculation of revenue per year:

Revenue per year =Revenue per day×Days of operation=($235×2×150)×350=$70,500×350=$24,675,000

Calculation of annual cash flow:

Annual cash flow=Revenue per year−Total annual operating costs=24,675,000−3,250,000=21,425,000

Calculation of present value of future cash flow:

Present value of future cash flow=Future value×Discount factor=$21,425,000×7.46944=$40,032,752

2.

Expert Solution

To determine

Find out the NPV of the aircraft if the booking is 80% of seating capacity.

Explanation of Solution

Use the following formula to calculate NPV of the investment:

NPV=Present value of cash inflow(P)−Present value of cash outflow(I)

Substitute $123,171,066² for P and $120,000,000 for I in the above formula.

NPV=$123,171,066−$120,000,000=$3,171,066

Therefore, net present value of the investment is $3,171,066.

The company should buy the aircraft because NPV is positive.

Working Note:

2. Calculation of revised annual cash flow:

Annual cash flow=Revenue per year−Total annual operating costs=(24,675,000×80100)−3,250,000=19,740,000−3,250,000=$16,490,000

Calculation of present value of future cash flow:

Present value of future cash flow=Future value×Discount factor=$16,490,000×7.46944=$123,171,066

3.

Expert Solution

To determine

Calculate the seating rate at which NPV will equal zero.

Explanation of Solution

Calculate seating rate:

Use the following formula to calculate seats to be sold:

Seats to be sold=Revenue per dayRevenue per seat

Substitute $55,187³ for revenue per day and $470 for revenue per seat in the above formula.

Seats to be sold=$55,187$470=118 seats

Therefore, seats to be sold in each trip are 118 seats.

Calculate seating rate:

Use the following formula to calculate the seating rate:

Seating rate=Seats to be soldTotal seats

Substitute 118 seats for seats to be sold and 150 seats for total seats in the above formula.

Seating rate=118 seats150 seats=79%

Working Note:

3. Calculation of annual cash flow at which NPV equals 0:

Annual cash flow=Cost of the aircraftDiscount factor=$120,000,0007.46944=$16,065,461

Calculation of annual revenue:

Annual revenue=Annual cash flow+Total annual opertaing cost=$16,065,461+$3,250,000=$19,315,461

Calculation of revenue per day:

Revenue per day=Annual revenueOperation days=$19,315,461350=$55,187

4.

Expert Solution

To determine

Calculate the seating rate at which NPV will equal zero and the price per passenger is increased by 10%. Also state the recommendations.

Explanation of Solution

Use the following formula to calculate seats to be sold:

Seats to be sold=Revenue per dayRevenue per seat

Substitute $55,187³ for revenue per day and $517⁴ for revenue per seat in the above formula.

Seats to be sold=$55,187$517=107 seats

Therefore, seats to be sold in each trip are 107 seats.

Calculate seating rate:

Use the following formula to calculate the seating rate:

Seating rate=Seats to be soldTotal seats

Substitute 107 seats for seats to be sold and 150 seats for total seats in the above formula.

Seating rate=107 seats150 seats=71%

The seating will be between 70% and 90% of the total seating. There is a possibility that the actual seating rate can be lower than the estimated rate. The interval is of 20% and it is most likely that NPV remain positive.

These analyses are drafted with the assumption that all the factors are constant. However, the price of the factors can change during the course of the useful of the aircraft.

Working Note:

4. Calculation of round trip average price:

Round−trip average price=Price of round trip×1.1=(2×$235)×1.1=$470×1.1=$517

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Answer 3

Textbook Question

Chapter 12, Problem 44P

Net Present Value, Uncertainty

Ondi Airlines is interested in acquiring a new aircraft to service a new route. The route will be from Tulsa to Denver. The aircraft will fly one round-trip daily except for scheduled maintenance days. There are 15 maintenance days scheduled each year. The seating capacity of the aircraft is 150. Flights are expected to be fully booked. The average revenue per passenger per flight (one-way) is $235. Annual operating costs of the aircraft follow:

Chapter 12, Problem 44P, Net Present Value, Uncertainty Ondi Airlines is interested in acquiring a new aircraft to service a

The aircraft will cost $120,000,000 and has an expected life of 20 years. The company requires a 12% return. Assume there are no income taxes.

Required:

1. Calculate the NPV for the aircraft. Should the company buy it?
2. In discussing the proposal, the marketing manager for the airline believes that the assumption of 100% booking is unrealistic. He believes that the booking rate will be somewhere between 70 and 90%, with the most likely rate being 80%. Recalculate the NPV by using an 80% seating capacity. Should the aircraft be purchased?
3. Calculate the average seating rate that would be needed so that NPV will equal zero. Round the seating rate to the nearest percent.
4. CONCEPTUAL CONNECTION Suppose that the price per passenger could be increased by 10% without any effect on demand. What is the average seating rate now needed to achieve an NPV equal to zero? What would you now recommend? Round the seating rate to the nearest percent.

1.

Expert Solution

To determine

Find out the NPV of the aircraft. Also, recommend that the company should buy it or not.

Explanation of Solution

Net Present Value:

The remaining balance of the present value of a project’s inflows and outflows is known as net present value (NPV). It is a discounting model of capital investment decision. A project with a positive NPV increases the wealth of a firm whereas a project with a negative NPV decreases the wealth of a firm.

Use the following formula to calculate NPV of the investment:

NPV=Present value of cash inflow(P)−Present value of cash outflow(I)

Substitute $160,032,752¹ for P and $120,000,000 for I in the above formula.

NPV=$160,032,752−$120,000,000=$40,032,752

Therefore, net present value of the investment is $40,032,752.

The company should buy the aircraft because NPV is positive.

Working Note:

1. Calculation of expected cash flow:

Calculation of days of operation:

Days of operation=Total days−Maintenance days=365 days−15 days=350 days

Calculation of revenue per year:

Revenue per year =Revenue per day×Days of operation=($235×2×150)×350=$70,500×350=$24,675,000

Calculation of annual cash flow:

Annual cash flow=Revenue per year−Total annual operating costs=24,675,000−3,250,000=21,425,000

Calculation of present value of future cash flow:

Present value of future cash flow=Future value×Discount factor=$21,425,000×7.46944=$40,032,752

2.

Expert Solution

To determine

Find out the NPV of the aircraft if the booking is 80% of seating capacity.

Explanation of Solution

Use the following formula to calculate NPV of the investment:

NPV=Present value of cash inflow(P)−Present value of cash outflow(I)

Substitute $123,171,066² for P and $120,000,000 for I in the above formula.

NPV=$123,171,066−$120,000,000=$3,171,066

Therefore, net present value of the investment is $3,171,066.

The company should buy the aircraft because NPV is positive.

Working Note:

2. Calculation of revised annual cash flow:

Annual cash flow=Revenue per year−Total annual operating costs=(24,675,000×80100)−3,250,000=19,740,000−3,250,000=$16,490,000

Calculation of present value of future cash flow:

Present value of future cash flow=Future value×Discount factor=$16,490,000×7.46944=$123,171,066

3.

Expert Solution

To determine

Calculate the seating rate at which NPV will equal zero.

Explanation of Solution

Calculate seating rate:

Use the following formula to calculate seats to be sold:

Seats to be sold=Revenue per dayRevenue per seat

Substitute $55,187³ for revenue per day and $470 for revenue per seat in the above formula.

Seats to be sold=$55,187$470=118 seats

Therefore, seats to be sold in each trip are 118 seats.

Calculate seating rate:

Use the following formula to calculate the seating rate:

Seating rate=Seats to be soldTotal seats

Substitute 118 seats for seats to be sold and 150 seats for total seats in the above formula.

Seating rate=118 seats150 seats=79%

Working Note:

3. Calculation of annual cash flow at which NPV equals 0:

Annual cash flow=Cost of the aircraftDiscount factor=$120,000,0007.46944=$16,065,461

Calculation of annual revenue:

Annual revenue=Annual cash flow+Total annual opertaing cost=$16,065,461+$3,250,000=$19,315,461

Calculation of revenue per day:

Revenue per day=Annual revenueOperation days=$19,315,461350=$55,187

4.

Expert Solution

To determine

Calculate the seating rate at which NPV will equal zero and the price per passenger is increased by 10%. Also state the recommendations.

Explanation of Solution

Use the following formula to calculate seats to be sold:

Seats to be sold=Revenue per dayRevenue per seat

Substitute $55,187³ for revenue per day and $517⁴ for revenue per seat in the above formula.

Seats to be sold=$55,187$517=107 seats

Therefore, seats to be sold in each trip are 107 seats.

Calculate seating rate:

Use the following formula to calculate the seating rate:

Seating rate=Seats to be soldTotal seats

Substitute 107 seats for seats to be sold and 150 seats for total seats in the above formula.

Seating rate=107 seats150 seats=71%

The seating will be between 70% and 90% of the total seating. There is a possibility that the actual seating rate can be lower than the estimated rate. The interval is of 20% and it is most likely that NPV remain positive.

These analyses are drafted with the assumption that all the factors are constant. However, the price of the factors can change during the course of the useful of the aircraft.

Working Note:

4. Calculation of round trip average price:

Round−trip average price=Price of round trip×1.1=(2×$235)×1.1=$470×1.1=$517

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Answer 4

Textbook Question

Chapter 12, Problem 44P

Net Present Value, Uncertainty

Ondi Airlines is interested in acquiring a new aircraft to service a new route. The route will be from Tulsa to Denver. The aircraft will fly one round-trip daily except for scheduled maintenance days. There are 15 maintenance days scheduled each year. The seating capacity of the aircraft is 150. Flights are expected to be fully booked. The average revenue per passenger per flight (one-way) is $235. Annual operating costs of the aircraft follow:

Chapter 12, Problem 44P, Net Present Value, Uncertainty Ondi Airlines is interested in acquiring a new aircraft to service a

The aircraft will cost $120,000,000 and has an expected life of 20 years. The company requires a 12% return. Assume there are no income taxes.

Required:

1. Calculate the NPV for the aircraft. Should the company buy it?
2. In discussing the proposal, the marketing manager for the airline believes that the assumption of 100% booking is unrealistic. He believes that the booking rate will be somewhere between 70 and 90%, with the most likely rate being 80%. Recalculate the NPV by using an 80% seating capacity. Should the aircraft be purchased?
3. Calculate the average seating rate that would be needed so that NPV will equal zero. Round the seating rate to the nearest percent.
4. CONCEPTUAL CONNECTION Suppose that the price per passenger could be increased by 10% without any effect on demand. What is the average seating rate now needed to achieve an NPV equal to zero? What would you now recommend? Round the seating rate to the nearest percent.

1.

Expert Solution

To determine

Find out the NPV of the aircraft. Also, recommend that the company should buy it or not.

Explanation of Solution

Net Present Value:

The remaining balance of the present value of a project’s inflows and outflows is known as net present value (NPV). It is a discounting model of capital investment decision. A project with a positive NPV increases the wealth of a firm whereas a project with a negative NPV decreases the wealth of a firm.

Use the following formula to calculate NPV of the investment:

NPV=Present value of cash inflow(P)−Present value of cash outflow(I)

Substitute $160,032,752¹ for P and $120,000,000 for I in the above formula.

NPV=$160,032,752−$120,000,000=$40,032,752

Therefore, net present value of the investment is $40,032,752.

The company should buy the aircraft because NPV is positive.

Working Note:

1. Calculation of expected cash flow:

Calculation of days of operation:

Days of operation=Total days−Maintenance days=365 days−15 days=350 days

Calculation of revenue per year:

Revenue per year =Revenue per day×Days of operation=($235×2×150)×350=$70,500×350=$24,675,000

Calculation of annual cash flow:

Annual cash flow=Revenue per year−Total annual operating costs=24,675,000−3,250,000=21,425,000

Calculation of present value of future cash flow:

Present value of future cash flow=Future value×Discount factor=$21,425,000×7.46944=$40,032,752

2.

Expert Solution

To determine

Find out the NPV of the aircraft if the booking is 80% of seating capacity.

Explanation of Solution

Use the following formula to calculate NPV of the investment:

NPV=Present value of cash inflow(P)−Present value of cash outflow(I)

Substitute $123,171,066² for P and $120,000,000 for I in the above formula.

NPV=$123,171,066−$120,000,000=$3,171,066

Therefore, net present value of the investment is $3,171,066.

The company should buy the aircraft because NPV is positive.

Working Note:

2. Calculation of revised annual cash flow:

Annual cash flow=Revenue per year−Total annual operating costs=(24,675,000×80100)−3,250,000=19,740,000−3,250,000=$16,490,000

Calculation of present value of future cash flow:

Present value of future cash flow=Future value×Discount factor=$16,490,000×7.46944=$123,171,066

3.

Expert Solution

To determine

Calculate the seating rate at which NPV will equal zero.

Explanation of Solution

Calculate seating rate:

Use the following formula to calculate seats to be sold:

Seats to be sold=Revenue per dayRevenue per seat

Substitute $55,187³ for revenue per day and $470 for revenue per seat in the above formula.

Seats to be sold=$55,187$470=118 seats

Therefore, seats to be sold in each trip are 118 seats.

Calculate seating rate:

Use the following formula to calculate the seating rate:

Seating rate=Seats to be soldTotal seats

Substitute 118 seats for seats to be sold and 150 seats for total seats in the above formula.

Seating rate=118 seats150 seats=79%

Working Note:

3. Calculation of annual cash flow at which NPV equals 0:

Annual cash flow=Cost of the aircraftDiscount factor=$120,000,0007.46944=$16,065,461

Calculation of annual revenue:

Annual revenue=Annual cash flow+Total annual opertaing cost=$16,065,461+$3,250,000=$19,315,461

Calculation of revenue per day:

Revenue per day=Annual revenueOperation days=$19,315,461350=$55,187

4.

Expert Solution

To determine

Calculate the seating rate at which NPV will equal zero and the price per passenger is increased by 10%. Also state the recommendations.

Explanation of Solution

Use the following formula to calculate seats to be sold:

Seats to be sold=Revenue per dayRevenue per seat

Substitute $55,187³ for revenue per day and $517⁴ for revenue per seat in the above formula.

Seats to be sold=$55,187$517=107 seats

Therefore, seats to be sold in each trip are 107 seats.

Calculate seating rate:

Use the following formula to calculate the seating rate:

Seating rate=Seats to be soldTotal seats

Substitute 107 seats for seats to be sold and 150 seats for total seats in the above formula.

Seating rate=107 seats150 seats=71%

The seating will be between 70% and 90% of the total seating. There is a possibility that the actual seating rate can be lower than the estimated rate. The interval is of 20% and it is most likely that NPV remain positive.

These analyses are drafted with the assumption that all the factors are constant. However, the price of the factors can change during the course of the useful of the aircraft.

Working Note:

4. Calculation of round trip average price:

Round−trip average price=Price of round trip×1.1=(2×$235)×1.1=$470×1.1=$517

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Answer 5

Textbook Question

Answer 6

Textbook Question

Answer 7

1.

Expert Solution

To determine

Find out the NPV of the aircraft. Also, recommend that the company should buy it or not.

Explanation of Solution

Net Present Value:

The remaining balance of the present value of a project’s inflows and outflows is known as net present value (NPV). It is a discounting model of capital investment decision. A project with a positive NPV increases the wealth of a firm whereas a project with a negative NPV decreases the wealth of a firm.

Use the following formula to calculate NPV of the investment:

NPV=Present value of cash inflow(P)−Present value of cash outflow(I)

Substitute $160,032,752¹ for P and $120,000,000 for I in the above formula.

NPV=$160,032,752−$120,000,000=$40,032,752

Therefore, net present value of the investment is $40,032,752.

The company should buy the aircraft because NPV is positive.

Working Note:

1. Calculation of expected cash flow:

Calculation of days of operation:

Days of operation=Total days−Maintenance days=365 days−15 days=350 days

Calculation of revenue per year:

Revenue per year =Revenue per day×Days of operation=($235×2×150)×350=$70,500×350=$24,675,000

Calculation of annual cash flow:

Annual cash flow=Revenue per year−Total annual operating costs=24,675,000−3,250,000=21,425,000

Calculation of present value of future cash flow:

Present value of future cash flow=Future value×Discount factor=$21,425,000×7.46944=$40,032,752

2.

Expert Solution

To determine

Find out the NPV of the aircraft if the booking is 80% of seating capacity.

Explanation of Solution

Use the following formula to calculate NPV of the investment:

NPV=Present value of cash inflow(P)−Present value of cash outflow(I)

Substitute $123,171,066² for P and $120,000,000 for I in the above formula.

NPV=$123,171,066−$120,000,000=$3,171,066

Therefore, net present value of the investment is $3,171,066.

The company should buy the aircraft because NPV is positive.

Working Note:

2. Calculation of revised annual cash flow:

Annual cash flow=Revenue per year−Total annual operating costs=(24,675,000×80100)−3,250,000=19,740,000−3,250,000=$16,490,000

Calculation of present value of future cash flow:

Present value of future cash flow=Future value×Discount factor=$16,490,000×7.46944=$123,171,066

3.

Expert Solution

To determine

Calculate the seating rate at which NPV will equal zero.

Explanation of Solution

Calculate seating rate:

Use the following formula to calculate seats to be sold:

Seats to be sold=Revenue per dayRevenue per seat

Substitute $55,187³ for revenue per day and $470 for revenue per seat in the above formula.

Seats to be sold=$55,187$470=118 seats

Therefore, seats to be sold in each trip are 118 seats.

Calculate seating rate:

Use the following formula to calculate the seating rate:

Seating rate=Seats to be soldTotal seats

Substitute 118 seats for seats to be sold and 150 seats for total seats in the above formula.

Seating rate=118 seats150 seats=79%

Working Note:

3. Calculation of annual cash flow at which NPV equals 0:

Annual cash flow=Cost of the aircraftDiscount factor=$120,000,0007.46944=$16,065,461

Calculation of annual revenue:

Annual revenue=Annual cash flow+Total annual opertaing cost=$16,065,461+$3,250,000=$19,315,461

Calculation of revenue per day:

Revenue per day=Annual revenueOperation days=$19,315,461350=$55,187

4.

Expert Solution

To determine

Calculate the seating rate at which NPV will equal zero and the price per passenger is increased by 10%. Also state the recommendations.

Explanation of Solution

Use the following formula to calculate seats to be sold:

Seats to be sold=Revenue per dayRevenue per seat

Substitute $55,187³ for revenue per day and $517⁴ for revenue per seat in the above formula.

Seats to be sold=$55,187$517=107 seats

Therefore, seats to be sold in each trip are 107 seats.

Calculate seating rate:

Use the following formula to calculate the seating rate:

Seating rate=Seats to be soldTotal seats

Substitute 107 seats for seats to be sold and 150 seats for total seats in the above formula.

Seating rate=107 seats150 seats=71%

The seating will be between 70% and 90% of the total seating. There is a possibility that the actual seating rate can be lower than the estimated rate. The interval is of 20% and it is most likely that NPV remain positive.

These analyses are drafted with the assumption that all the factors are constant. However, the price of the factors can change during the course of the useful of the aircraft.

Working Note:

4. Calculation of round trip average price:

Round−trip average price=Price of round trip×1.1=(2×$235)×1.1=$470×1.1=$517

Answer 8

1.

Expert Solution

To determine

Find out the NPV of the aircraft. Also, recommend that the company should buy it or not.

Explanation of Solution

Net Present Value:

The remaining balance of the present value of a project’s inflows and outflows is known as net present value (NPV). It is a discounting model of capital investment decision. A project with a positive NPV increases the wealth of a firm whereas a project with a negative NPV decreases the wealth of a firm.

Use the following formula to calculate NPV of the investment:

NPV=Present value of cash inflow(P)−Present value of cash outflow(I)

Substitute $160,032,752¹ for P and $120,000,000 for I in the above formula.

NPV=$160,032,752−$120,000,000=$40,032,752

Therefore, net present value of the investment is $40,032,752.

The company should buy the aircraft because NPV is positive.

Working Note:

1. Calculation of expected cash flow:

Calculation of days of operation:

Days of operation=Total days−Maintenance days=365 days−15 days=350 days

Calculation of revenue per year:

Revenue per year =Revenue per day×Days of operation=($235×2×150)×350=$70,500×350=$24,675,000

Calculation of annual cash flow:

Annual cash flow=Revenue per year−Total annual operating costs=24,675,000−3,250,000=21,425,000

Calculation of present value of future cash flow:

Present value of future cash flow=Future value×Discount factor=$21,425,000×7.46944=$40,032,752

Answer 9

1.

Expert Solution

Answer 10

1.

Expert Solution

Answer 11

Expert Solution

Answer 12

To determine

Find out the NPV of the aircraft. Also, recommend that the company should buy it or not.

Answer 13

Explanation of Solution

Net Present Value:

The remaining balance of the present value of a project’s inflows and outflows is known as net present value (NPV). It is a discounting model of capital investment decision. A project with a positive NPV increases the wealth of a firm whereas a project with a negative NPV decreases the wealth of a firm.

Use the following formula to calculate NPV of the investment:

NPV=Present value of cash inflow(P)−Present value of cash outflow(I)

Substitute $160,032,752¹ for P and $120,000,000 for I in the above formula.

NPV=$160,032,752−$120,000,000=$40,032,752

Therefore, net present value of the investment is $40,032,752.

The company should buy the aircraft because NPV is positive.

Working Note:

1. Calculation of expected cash flow:

Calculation of days of operation:

Days of operation=Total days−Maintenance days=365 days−15 days=350 days

Calculation of revenue per year:

Revenue per year =Revenue per day×Days of operation=($235×2×150)×350=$70,500×350=$24,675,000

Calculation of annual cash flow:

Annual cash flow=Revenue per year−Total annual operating costs=24,675,000−3,250,000=21,425,000

Calculation of present value of future cash flow:

Present value of future cash flow=Future value×Discount factor=$21,425,000×7.46944=$40,032,752

Answer 14

2.

Expert Solution

To determine

Find out the NPV of the aircraft if the booking is 80% of seating capacity.

Explanation of Solution

Use the following formula to calculate NPV of the investment:

NPV=Present value of cash inflow(P)−Present value of cash outflow(I)

Substitute $123,171,066² for P and $120,000,000 for I in the above formula.

NPV=$123,171,066−$120,000,000=$3,171,066

Therefore, net present value of the investment is $3,171,066.

The company should buy the aircraft because NPV is positive.

Working Note:

2. Calculation of revised annual cash flow:

Annual cash flow=Revenue per year−Total annual operating costs=(24,675,000×80100)−3,250,000=19,740,000−3,250,000=$16,490,000

Calculation of present value of future cash flow:

Present value of future cash flow=Future value×Discount factor=$16,490,000×7.46944=$123,171,066

Answer 15

2.

Expert Solution

Answer 16

2.

Expert Solution

Answer 17

Expert Solution

Answer 18

To determine

Find out the NPV of the aircraft if the booking is 80% of seating capacity.

Answer 19

Explanation of Solution

Use the following formula to calculate NPV of the investment:

NPV=Present value of cash inflow(P)−Present value of cash outflow(I)

Substitute $123,171,066² for P and $120,000,000 for I in the above formula.

NPV=$123,171,066−$120,000,000=$3,171,066

Therefore, net present value of the investment is $3,171,066.

The company should buy the aircraft because NPV is positive.

Working Note:

2. Calculation of revised annual cash flow:

Annual cash flow=Revenue per year−Total annual operating costs=(24,675,000×80100)−3,250,000=19,740,000−3,250,000=$16,490,000

Calculation of present value of future cash flow:

Present value of future cash flow=Future value×Discount factor=$16,490,000×7.46944=$123,171,066

Answer 20

3.

Expert Solution

To determine

Calculate the seating rate at which NPV will equal zero.

Explanation of Solution

Calculate seating rate:

Use the following formula to calculate seats to be sold:

Seats to be sold=Revenue per dayRevenue per seat

Substitute $55,187³ for revenue per day and $470 for revenue per seat in the above formula.

Seats to be sold=$55,187$470=118 seats

Therefore, seats to be sold in each trip are 118 seats.

Calculate seating rate:

Use the following formula to calculate the seating rate:

Seating rate=Seats to be soldTotal seats

Substitute 118 seats for seats to be sold and 150 seats for total seats in the above formula.

Seating rate=118 seats150 seats=79%

Working Note:

3. Calculation of annual cash flow at which NPV equals 0:

Annual cash flow=Cost of the aircraftDiscount factor=$120,000,0007.46944=$16,065,461

Calculation of annual revenue:

Annual revenue=Annual cash flow+Total annual opertaing cost=$16,065,461+$3,250,000=$19,315,461

Calculation of revenue per day:

Revenue per day=Annual revenueOperation days=$19,315,461350=$55,187

Answer 21

3.

Expert Solution

Answer 22

3.

Expert Solution

Answer 23

Expert Solution

Answer 24

To determine

Calculate the seating rate at which NPV will equal zero.

Answer 25

Explanation of Solution

Calculate seating rate:

Use the following formula to calculate seats to be sold:

Seats to be sold=Revenue per dayRevenue per seat

Substitute $55,187³ for revenue per day and $470 for revenue per seat in the above formula.

Seats to be sold=$55,187$470=118 seats

Therefore, seats to be sold in each trip are 118 seats.

Calculate seating rate:

Use the following formula to calculate the seating rate:

Seating rate=Seats to be soldTotal seats

Substitute 118 seats for seats to be sold and 150 seats for total seats in the above formula.

Seating rate=118 seats150 seats=79%

Working Note:

3. Calculation of annual cash flow at which NPV equals 0:

Annual cash flow=Cost of the aircraftDiscount factor=$120,000,0007.46944=$16,065,461

Calculation of annual revenue:

Annual revenue=Annual cash flow+Total annual opertaing cost=$16,065,461+$3,250,000=$19,315,461

Calculation of revenue per day:

Revenue per day=Annual revenueOperation days=$19,315,461350=$55,187

Answer 26

4.

Expert Solution

To determine

Calculate the seating rate at which NPV will equal zero and the price per passenger is increased by 10%. Also state the recommendations.

Explanation of Solution

Use the following formula to calculate seats to be sold:

Seats to be sold=Revenue per dayRevenue per seat

Substitute $55,187³ for revenue per day and $517⁴ for revenue per seat in the above formula.

Seats to be sold=$55,187$517=107 seats

Therefore, seats to be sold in each trip are 107 seats.

Calculate seating rate:

Use the following formula to calculate the seating rate:

Seating rate=Seats to be soldTotal seats

Substitute 107 seats for seats to be sold and 150 seats for total seats in the above formula.

Seating rate=107 seats150 seats=71%

The seating will be between 70% and 90% of the total seating. There is a possibility that the actual seating rate can be lower than the estimated rate. The interval is of 20% and it is most likely that NPV remain positive.

These analyses are drafted with the assumption that all the factors are constant. However, the price of the factors can change during the course of the useful of the aircraft.

Working Note:

4. Calculation of round trip average price:

Round−trip average price=Price of round trip×1.1=(2×$235)×1.1=$470×1.1=$517

Answer 27

4.

Expert Solution

Answer 28

4.

Expert Solution

Answer 29

Expert Solution

Answer 30

To determine

Calculate the seating rate at which NPV will equal zero and the price per passenger is increased by 10%. Also state the recommendations.

Answer 31

Explanation of Solution

Use the following formula to calculate seats to be sold:

Seats to be sold=Revenue per dayRevenue per seat

Substitute $55,187³ for revenue per day and $517⁴ for revenue per seat in the above formula.

Seats to be sold=$55,187$517=107 seats

Therefore, seats to be sold in each trip are 107 seats.

Calculate seating rate:

Use the following formula to calculate the seating rate:

Seating rate=Seats to be soldTotal seats

Substitute 107 seats for seats to be sold and 150 seats for total seats in the above formula.

Seating rate=107 seats150 seats=71%

The seating will be between 70% and 90% of the total seating. There is a possibility that the actual seating rate can be lower than the estimated rate. The interval is of 20% and it is most likely that NPV remain positive.

These analyses are drafted with the assumption that all the factors are constant. However, the price of the factors can change during the course of the useful of the aircraft.

Working Note:

4. Calculation of round trip average price:

Round−trip average price=Price of round trip×1.1=(2×$235)×1.1=$470×1.1=$517