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Unequal lives of planes

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Shao Airlines is considering two alternative planes. Plane A has an expected life of 5 years, will cost $100 million, and will produce net cash flows of $30 million per year. Plane B has a life of 10 years, will cost $132 million, and will produce net cash flows of $25 million per year. Shao plans to serve the route for 10 years. Inflation in operating costs, airplane costs, and fares is expected to be zero, and the company's cost of capital is 12 percent. By how much would the value of the company increase if it accepted the better project (plane)?

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Solution Summary

This solution contains an explanation of how to calculate an increase in value for a better airline.

Solution provided by:
Jayant Kumar, MBA
Education
  • MBA, Indian Institute of Finance
  • Bsc, Madras University
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