Bailey Airline Company is considering expanding its territory. The company has t

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 $22,750,000; it will enable the company to increase its annual cash inflow by $6,500,000 per year. The plane is expected to have a useful life of five years and no salvage value. The second plane costs $36,100,000; it will enable the company to increase annual cash flow by $9,500,000 per year. This plane has an eight-year useful life and a zero salvage value.

Required
a-1.

Determine the payback period for each investment alternative. (Round your answers to 1 decimal place.)

Explanation / Answer

Payback period = Initial Investment/ Annual Cash inflow

First Airplane payback period= 22,750,000/6,500,000= 3.5 Years

Second Airplane payback period= 36,100,000/9,500,000= 3.8 Years

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