9-70 Midwest Airlines (MWA) is planning to expand its A fleet of jets to replace

Question

9-70 Midwest Airlines (MWA) is planning to expand its A fleet of jets to replace some old planes and to expand its routes. It has received a proposal to purchase 112 small jets over the next 4 years. What annual net revenue must each jet produce to break even on its operating cost? The analysis should be done by find- ing the EUAC for the 10-year planned ownership period, MWA has a MARR of 12%, purchases the jet for $22 million, has operating and maintenance costs of $3.2 million the first year, increasing 8% per year, and performs a major maintenance upgrade costing $4.5M at end of Year 5. Assume the plane has a salvage value at end of Year 10 of $13 million. 9-76 A c mus be will whil 100 will ately per s

Explanation / Answer

Puchase plan is 112 jets over next 4 years

MARR= 12%

Cost of one Jet =$22 million

Salvage Value after 10 Years =$13 million

EUA (one-time cash flows) = P(A/P,12%,10) + M(A/P,12%,10)(1.12)-5 – S(A/F,12%,10)

   = (22,000,000)(0.17698) + (4,500,000)(0.17698)(0.5674) – (13,000,000)(0.05698)

                                       = $3,893,651 + 796,429 – $740,794

                                       = $3,949,286

EUA (Continuing cash flows) = $3,200,000/(0.12-0.08)*{(1-(1.08/1.12)^10)*(A/P,12%,10)

                                          = $3,200,000/0.04*0.30488*0.17698

                                          = $4,316,770

Total EUAC = $3,949,286 + $4,316,770 = $8,266,056

Hence, annual revenue of $8,266,056 would be required to break even on the costs.

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