You are contemplating the purchase of a one-half interest in a corporate airplane to facilitate the expansion of your business into two new geographic areas. The acquisition would eliminate about...


You are contemplating the purchase of a one-half interest in a corporate airplane to


facilitate the expansion of your business into two new geographic areas. The acquisition


would eliminate about $220,000 in estimated annual expenditures for commercial flights,


mileage reimbursements, rental cars, and hotels for each of the next 10 years. The total


purchase price for the half-share is $6 million, plus associated annual operating costs of


$100,000. Assume the plane can be fully depreciated on a straight-line basis for tax


purposes over 10 years. The company’s weighted average cost of capital (commonly


referred to as WACC) is 8%, and its corporate tax rate is 40%. Does this endeavor


present a positive or negative net present value (NPV)? If positive, how much value is


being created for the company through the purchase of this asset? If negative, what


additional annual cash flows would be needed for the NPV to equal zero? To what


phenomena might those additional positive cash flows be ascribable?



Jun 06, 2022
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