The president's executive jet is not fully utilized. You judge that its use by other officers would increase direct operating costs by only $23,000 a year and would save $100,000 a year in airline bills. On the other hand, you believe that with the increased use the company will need to replace the jet at the end of three years rather than four. A new jet costs $1.13 million and (at its current low rate of use) has a life of Six years. Assume that the company does not pay taxes. All cash flows are forecasted in real terms. The real opportunity cost of capital is 7%. a. Calculate the equivalent annual cost of a new jet. (Do not round intermediate calculations. Enter your answer in dollars not in millions. Round your answer to 2 decimal places. Enter your answer as a positive value.) b. Calculate the present value of the additional cost of replacing the jet one year earlier than under its current usage. (Do not round intermediate calculations. Enter your answer in dollars not in millions. Round your answer to 2 decimal places. Enter your answer as a positive value.) c. Calculate the present value of the savings. (Do not round intermediate calculations. Enter your answer in dollars not in millions. Round your answer to 2 decimal places.) d. Should you try to persuade the president to allow other officers to use the plane? Answer is not complete. a. Equivalent annual cost b. Present value C. Present value d. Should you try to persuade the president to allow other officers to use the plane?
The president's executive jet is not fully utilized. You judge that its use by other officers would increase direct operating costs by only $23,000 a year and would save $100,000 a year in airline bills. On the other hand, you believe that with the increased use the company will need to replace the jet at the end of three years rather than four. A new jet costs $1.13 million and (at its current low rate of use) has a life of Six years. Assume that the company does not pay taxes. All cash flows are forecasted in real terms. The real opportunity cost of capital is 7%. a. Calculate the equivalent annual cost of a new jet. (Do not round intermediate calculations. Enter your answer in dollars not in millions. Round your answer to 2 decimal places. Enter your answer as a positive value.) b. Calculate the present value of the additional cost of replacing the jet one year earlier than under its current usage. (Do not round intermediate calculations. Enter your answer in dollars not in millions. Round your answer to 2 decimal places. Enter your answer as a positive value.) c. Calculate the present value of the savings. (Do not round intermediate calculations. Enter your answer in dollars not in millions. Round your answer to 2 decimal places.) d. Should you try to persuade the president to allow other officers to use the plane? Answer is not complete. a. Equivalent annual cost b. Present value C. Present value d. Should you try to persuade the president to allow other officers to use the plane?
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
Related questions
Question
Bhupatbhai
Transcribed Image Text:The president's executive jet is not fully utilized. You judge that its use by other officers would increase direct operating costs by only
$23,000 a year and would save $100,000 a year in airline bills. On the other hand, you believe that with the increased use the
company will need to replace the jet at the end of three years rather than four. A new jet costs $1.13 million and (at its current low rate
of use) has a life of Six years. Assume that the company does not pay taxes. All cash flows are forecasted in real terms. The real
opportunity cost of capital is 7%.
a. Calculate the equivalent annual cost of a new jet. (Do not round intermediate calculations. Enter your answer in dollars not in
millions. Round your answer to 2 decimal places. Enter your answer as a positive value.)
b. Calculate the present value of the additional cost of replacing the jet one year earlier than under its current usage. (Do not round
intermediate calculations. Enter your answer in dollars not in millions. Round your answer to 2 decimal places. Enter your
answer as a positive value.)
c. Calculate the present value of the savings. (Do not round intermediate calculations. Enter your answer in dollars not in millions.
Round your answer to 2 decimal places.)
d. Should you try to persuade the president to allow other officers to use the plane?
Answer is not complete.
a.
Equivalent annual cost
b.
Present value
C.
Present value
d.
Should you try to persuade the president to allow other officers to use the plane?
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