You are contemplating the purchase of a one-half interest in a corporate airplane
Question # 00383048
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Updated on: 09/10/2016 12:24 AM Due on: 09/10/2016
- You are contemplating the purchase of a one-half interest in a corporate airplane to facilitate the expansion of your business into two new geographic areas. The acquisition would eliminate about $220,000 in estimates annual expenditures for commercial flights, mileage reimbursements rental cars, and hotels for each of the next 10 years. The total purchase price for the ½ share is $6 million, plus associated annual operating costs of $100,000. Assume the plane can be fully depreciated, on a straight line basis, for tax purposes over 10 years. The company’s weighted average cost of capital (WACC) is 8%, and its corporate tax rate is 40%. Does this endeavor present a positive or negative net present value (NPV)? If positive, how much value is being created for the company through the purchase of this asset? If negative, what additional annual cash flows are needed for the NPV to equal zero? To what phenomena might those additional positive cash flows be ascribable?
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Solution: You are contemplating the purchase of a one-half interest in a corporate airplane