Shao Airlines is considering two alternative planes. Plane A has an expected lif

Question

Shao Airlines is considering two alternative planes. Plane A has an expected life of 5

years, will cost $100 million, and will produce net cash flows of $30 million per year.

Plane B has a life of 10 years, will cost $132 million, and will produce net cash flows of

$25 million per year. Shao plans to serve the route for only 10 years. Inflation in operating

costs, airplane costs, and fares is expected to be zero, and the company’s cost of capital is

12%. By how much would the value of the company increase if it accepted the better

project (plane)?

*****SOLUTION*****

Plane A: Expected life = 5 years; Cost = $100 million; NCF = $30 million; COC = 12%.

Plane B: Expected life = 10 years; Cost = $132 million; NCF = $25 million; COC = 12%.

Answer:

NPVa= $12.76 million

NPVb= $9.26 million

How can I calculate the NPV in Excel for this problem? step by step (ex. Plane B = =25*5.65-132 (I am not sure where is the 5.65 comes from))

Explanation / Answer

NPV = Cash Inflows- cash Outflows Plane A Cash Inflows = 30/(1.12)+30(1.12)2+30/(1.12)3+30/(1.12)4+30/(1.12)5)                            = 30*.892+30*.797+30*.712+30*.636+30*.567                          =26.76+23.91+21.36+19.08+17.01                             = 108.12 NPV = 108.12-100 = $ 8.12 Million Plane B NPV = 25/(1.12)+25(1.12)2+25/(1.12)3+25/(1.12)4+25/(1.12)5) +25/(1.12)6+25(1.12)7+25/(1.12)8+25/(1.12)9+25/(1.12)10) NPV = 25*.892+25*.797+25*.712+25*.636+25*.567+25*.506+25*.452+25*.404+25*.360+25*.321 NPV = 141.26-132 = 9.26 Million

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