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 $17,980,000; 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 $38,000,000; it will enable the company to increase annual caslh 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.) Payback Pariod Altemative 1 years Alternative 2 years Identify the alternative Bailey should accept if the decision is based on the payback approach. Altemative 1 O Altemative2

Explanation / Answer

Decision Based on the Payback Period , The Project which is having Lower paybak period is Bettter and Selected for Investing Purpose. calculation of Payback period incase of Eqaul Cash Inflows Payback period = Cost of the Project /Annual Cash Inflows Payback period of First airplance = Initial Cost / annual cash Inflows =$17,980,000/$5,800,000 =3.1 years Payback period of Second airplance = Initial Cost / annual cash Inflows =$38,000,000/$9,500,000 = 4years a-1 Payback Period Payback period Alternative 1 First airplance 3.1 years Alternative 2 Second airplance 4 years a-2 Alternative should be selected by bailey Should accept if the decision is based on payback Approach Alternative 1 " First Place should be selected. Because it has Lower Payback Pariod Then Alternative 2

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