PQL Airlines is developing a new baggage check in system that is expected to cos
ID: 2656537 • Letter: P
Question
PQL Airlines is developing a new baggage check in system that is expected to cost $2,000,000 and they believe will be functional for 5 years. This system will be classified as a 3 year asset for MACRS and they expect to sell the physical part of the system after that point for $50,000. While this system would not necessary generate any additional revenue from passengers, there would be able to license the system to other airlines and expect to generate licensing revenues of $800,000 a year. In addition, there is an expected reduction in labor cost of $35,000 annually.
The 3 year MACRS table is: Year 1 - 33%; Year 2 - 45%; Year 3 - 15%; and year 4 - 7%.
Please calculate the Cash Flow from Assets for this project.
Then given a WACC of 9.5%, calculate the NPV, IRR, MIRR, Payback and Profitability Index
Should PQL move forward with the proposed New system? Why or why not?
Explanation / Answer
cash outflow
-2000000
annual savings
800000+35000
835000
Year
annual savings
present value of annual savings
annual depreciation
0
-2000000
-2000000
1
835000
762557.1
2
835000
696399.2
3
885000
635981
sum of present value of cash inflow
2094937
cash outflow
2000000
NPV
94937.2
PI
sum of present value of cash inflow/cash outflow
1.047469
IRR = Using IRR function in MS excel
irr(-2000000,835000,835000,885000)
13.18%
MIRR
Using MIRR function in MS excel
11.88%
Year
annual savings
cumulative annual savings
1
835000
835000
2
835000
1670000
3
885000
330000
amount to be recovered
Payback period = year before final recovery + (amount to be recovered /cash flow in final year of recovery)
2+(330000/885000)
2.37
cash outflow
-2000000
annual savings
800000+35000
835000
Year
annual savings
present value of annual savings
annual depreciation
0
-2000000
-2000000
1
835000
762557.1
2
835000
696399.2
3
885000
635981
sum of present value of cash inflow
2094937
cash outflow
2000000
NPV
94937.2
PI
sum of present value of cash inflow/cash outflow
1.047469
IRR = Using IRR function in MS excel
irr(-2000000,835000,835000,885000)
13.18%
MIRR
Using MIRR function in MS excel
11.88%
Year
annual savings
cumulative annual savings
1
835000
835000
2
835000
1670000
3
885000
330000
amount to be recovered
Payback period = year before final recovery + (amount to be recovered /cash flow in final year of recovery)
2+(330000/885000)
2.37
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