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?
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 ...