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    NPV , IRR for a company acquiring an aircraft

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    A company plans to acquire a piece corporate aircraft costing $5,000,000. The aircraft is expected to save the company $1,200,000 per year for each of its 5 year useful life. It will be depreciated straight line over 5 years. The firm's cost of capital is 12%. Its tax rate is 40%. It will replace another aircraft that was acquired 8 years ago at a cost of $3,000,000. The old aircraft was depreciated straight line over 5 years. The old aircraft will be sold for $500,000. what is the Net Present Value of the investment and the Internal Rate of Return?

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    Solution Preview

    We need to find the cash flow every year and calculate NPV and IRR.
    At present, the initial investment of the piece corporate aircraft is $5,000,000 minus the gain of selling the old aircraft. (Because the old aircraft was depreciated straight line over 5 years starting from 8 years ago. So the residual value is ...

    $2.49

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