Bailey Airline Company is considering expanding its territory. The company has t
ID: 2474676 • Letter: B
Question
Bailey 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 $9,000,000, it will enable the company to increase its annual cash inflow by $3,000,000 per year. The plane is expected to have a useful life of five years and no salvage value The second plane costs $18,000,000; it will enable the company to increase annual cash flow by $4,500,000 per year. This plane has an eight-year useful life and a zero salvage value. Required: Determine the payback period for each investment alternative Identify the alternative Bailey should accept if the decision is based on the payback approach Alternative 1 AlternativeExplanation / Answer
Project 1
year
Cashflow
Cum Cashflow
-
(9,000,000)
(9,000,000)
1
3,000,000
(6,000,000)
2
3,000,000
(3,000,000)
3
3,000,000
-
4
3,000,000
3,000,000
5
3,000,000
6,000,000
Project 2
year
Cashflow
Cum Cashflow
-
(18,000,000)
(18,000,000)
1
4,500,000
(13,500,000)
2
4,500,000
(9,000,000)
3
4,500,000
(4,500,000)
4
4,500,000
-
5
4,500,000
4,500,000
6
4,500,000
9,000,000
7
4,500,000
13,500,000
8
4,500,000
18,000,000
a-1.Payback period
Alternative 1: 3 years
Alternative 2: 4 years
a-2. Bailey should accept Alternative 1 as the payback period is less.
Project 1
year
Cashflow
Cum Cashflow
-
(9,000,000)
(9,000,000)
1
3,000,000
(6,000,000)
2
3,000,000
(3,000,000)
3
3,000,000
-
4
3,000,000
3,000,000
5
3,000,000
6,000,000
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