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Determining Increase in Company Value

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Wild West air is considering two alternative planes. Plane A has an expected life of 5 years, will cost $200, and will produce net cash flows of $60 per year. Plane B has a life of 10 years, will cost $245, and will produce net cash flows of $48 per year. Wild West plans to serve the route for 10 years. Inflation in operating costs, and fares is expected to be zero, and the company's cost of capital is 14 percent. Assume all costs are in millions. By how much (in millions) would the value of the company increase if it accepted the better project?

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Solution Summary

This solution provides steps necessary to determine the increased value of the company if accepted by a better project.

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Plane A: Compute on a financial calculator
CFo=-200;CF1=60, 4 times; CF2=60-200( ...

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