The Boing Corp. is considering building a new aircraft, the 787 - larger than th

Question

The Boing Corp. is considering building a new aircraft, the 787 - larger than the 747 and larger than the Airbus A380. The company's Renton WA facility, where 747's are currently manufactured, would have to be expanded. Expansion costs are forecast to be $2.5B, incurred at t=0. Also at time t=0, before production begins, inventory will be increased by $1.855B. Assume that this inventory is sold at the end of the project at t=2. The first sales from operation of the new plant will occur at the end of year 1 (t=1). Boing forecasts sales of 220 planes in each of the two years. The planes will be sold for $130M each. The cost of manufacturing a plane is $115M. Annual overhead expenses are $775M. The construction facilities are classified as 15 year property. When the plant is closed it will be sold for $1B. The company is in the 34% marginal tax bracket. Boneing's cost of capital is 12%. What is the initial cash flow for the project?

MACRS Depreciation Rates

Year   15-Year

1           5.00%

2           9.50%

3           8.55%

A) -$645M

B) -$1,885M

C) -$2,500M

D) -$4,355M

E) -$5,000M

Explanation / Answer

D) -$4,355M

PARTICULARS AMOUNT Expansion Costs -2500M (+) Inventory Cost -1855M TOTAL -4355M INITIAL CASH FLOW

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