Question

Munoz Airline Company is considering expanding its territory. The company has the opportunity to purchase one of two different used airplanes. The first airplane is expected to cost $15,660,000; it will enable the company to increase its annual cash inflow by $5,800,000 per year. The plane is expected to have a useful life of five years and no salvage value. The second plane costs $34,400,000; it will enable the company to increase annual cash flow by $8,600,000 per year. This plane has an eight-year useful life and a zero salvage value. Required Determine the payback period for each investment alternative and identify the alternative Munoz should accept if the decision is based on the payback approach. (Round your answers to 1 decimal place.)

Answer 1

Answer:

The correct answer is 2.7 years for plane 1 and 4 years for plane 2.

Plane 1 should be accepted.

Explanation:

According to the scenario, the computation of the given data are as follows:

Plane 1 Cost = $15,660,000

Annual cash inflow = $5,800,000

Plane 2 cost = $34,400,000

Annual cash inflow = $8,600,000

So, we can calculate the payback period by using following formula:

Payback period = cost ÷ Annual cash flow

So, For Plane 1 = $15,660,000 ÷ $5,800,000 = 2.7 years

For plane 2 = $34,400,000 ÷ $8,600,000 = 4 years

As, Plane 1 has less payback period so it should be accepted.