Unequal Lives Shao Airlines is considering the purchase of two alternative planes. Plane A has an expected life of 5 years, will cost $100 million, and will produce net cash flows of $29 million per year. Plane B has a life of 10 years, will cost $132 million and will produce net cash flows of $24 million per year. Shao plans to serve the route for only 10 years. Inflation in operating costs, airplane costs, and fares are expected to be zero, and the company's cost of capital is 8%. a. By how much would the value of the company increase if it accepted the better project (plane)? Enter your answer in millions. For example, an answer of $1.23 million should be entered as 1.23, not 1,230,000. Do not round intermediate calculations. Round your answer to two decimal places. $ million b. What is the equivalent annual annuity for each plane? Enter your answers in millions. For example, an answer of $1.23 million should be entered as 1.23, not 1,230,000. Do not round intermediate calculations. Round your answers to two decimal places. Plane A: $ million Plane B: $ million Icon Key Check My Work

Intermediate Financial Management (MindTap Course List)
13th Edition
ISBN:9781337395083
Author:Eugene F. Brigham, Phillip R. Daves
Publisher:Eugene F. Brigham, Phillip R. Daves
Chapter12: Capital Budgeting: Decision Criteria
Section: Chapter Questions
Problem 16P: Shao Airlines is considering the purchase of two alternative planes. Plane A has an expected life of...
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Unequal Lives
Shao Airlines is considering the purchase of two alternative planes. Plane A has an expected life of 5
years, will cost $100 million, and will produce net cash flows of $29 million per year. Plane B has a life of
10 years, will cost $132 million and will produce net cash flows of $24 million per year. Shao plans to
serve the route for only 10 years. Inflation in operating costs, airplane costs, and fares are expected to
be zero, and the company's cost of capital is 8%.
a. By how much would the value of the company increase if it accepted the better project (plane)? Enter
your answer in millions. For example, an answer of $1.23 million should be entered as 1.23, not
1,230,000. Do not round intermediate calculations. Round your answer to two decimal places.
$
million
b. What is the equivalent annual annuity for each plane? Enter your answers in millions. For example, an
answer of $1.23 million should be entered as 1.23, not 1,230,000. Do not round intermediate
calculations. Round your answers to two decimal places.
Plane A: $
million
Plane B: $
million
Icon Key
Check My Work
Transcribed Image Text:Unequal Lives Shao Airlines is considering the purchase of two alternative planes. Plane A has an expected life of 5 years, will cost $100 million, and will produce net cash flows of $29 million per year. Plane B has a life of 10 years, will cost $132 million and will produce net cash flows of $24 million per year. Shao plans to serve the route for only 10 years. Inflation in operating costs, airplane costs, and fares are expected to be zero, and the company's cost of capital is 8%. a. By how much would the value of the company increase if it accepted the better project (plane)? Enter your answer in millions. For example, an answer of $1.23 million should be entered as 1.23, not 1,230,000. Do not round intermediate calculations. Round your answer to two decimal places. $ million b. What is the equivalent annual annuity for each plane? Enter your answers in millions. For example, an answer of $1.23 million should be entered as 1.23, not 1,230,000. Do not round intermediate calculations. Round your answers to two decimal places. Plane A: $ million Plane B: $ million Icon Key Check My Work
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