Federal Express (FedEx) is considering adding 18 used Boeing 757 jets by buying the twin engine planes to replace some
Federal Express (FedEx) is considering adding 18 used Boeing 757 jets by buying the twin engine planes to replace some of its oldest, least-efficient freighters. Boeing 727s. FedEx pays about $10 million each, then FedEx spends about $5 million each to refit the planes to carry cargo. FedEx is required to make a 10% down payment at the time of delivery, and the balance is to be paid over a 10-year period at an interest rate of 12% compounded annually. The actual payment schedule calls for only interest payments over the 10-year period with the original principal amount to be paid off at the end of the 10th year. FedEx expects to generate $45 million per year in fuel savings by adding these aircrafts to its current fleet. The aircraft is expected to have a 15-year service life with a salvage value of 15% of the original purchase price. If the aircrafts are bought. they will be depreciated by the seven-year MACRS property classifications. The firm’s combined federal and state marginal tax rate is 38%, and its required minimum attractive rate of return is 18%.
(a) Use the generalized cash-flow approach to determine the cash flow associated with the debt financing.
(b) Is this project acceptable?
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