Your firm is doing a feasibility study to determine the minimum cost of hauling

Question

Your firm is doing a feasibility study to determine the minimum cost of hauling freight if it purchases a Boeing 777 Freighter at a delivered price of $225 million. The airplane will be used to haul freight between Memphis and Singapore. The 777 Freighter has a Maximum Revenue Payload of 112 tons or 224,000 pounds. It is expected to make 250 one-way trips per year and have a capacity factor of 0.88, thus the average hauling capacity for each trip for the Boeing 777 Freighter will be 197,120 pounds of cargo. Total operating cost including cabin crew, maintenance and fuel is estimated to be $60 million per year. Your firm will use 7-year MACRS depreciation, has a 40 percent federal plus state income tax rate and has a weighted average cost of capital (WACC) of 10 percent. Your firm plans to operate the airplane for 7-years. After seven years, the airplane is expected to have a salvage value of $90 million. Applying an absolute cash flow analysis, what is the minimum price that your client can charge per pound of cargo over the 7-year operating life of the airplane assuming 250 one-way trips per year?

Explanation / Answer

$1.81 per pound.

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