Question

Delta airlines is consider purchase of two alternative planes. Plane A has an expected life of 5 years, will cost $100 million and will produce net cash flow 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. Delta plans to serve the route for only 10 years. Delta's cost of capital is 12% and the inflation is expected to be zero. what is the equivalent annual annuity of plane A

Answer 1

Answer:

$2.26 million

Explanation:

Plane A:

Initial outlay = $100 million

Annual cash flows = $30 million

Expected life = 5 years

Cost of capital = 12%

EAW = (r x NPV) / [1 - (1 + r)⁻ⁿ]

Using a financial calculator: NPV = $8.14 million

EAW = (12% x $8.14) / [1 - (1 + 12%)⁻⁵] = $0.9768 / 0.432573 = $2.2581 ≈ $2.26 million