(All amounts in $ millions.) An airline is considering selling an old aircraft and replacing it with a new aircraft. The new aircraft costs $60 with a useful life of 20 years and will have no salvage value. The old aircraft has a remaining life of 20 years and final salvage value of $3. The Controller recommends purchasing the new aircraft because it will generate $30.34 in savings. The $30.34 was calculated as follows: (A) $2 operating saving + (B) $0.34 reduced depreciation + (C) $13 increase in cash + (D) $5 increase in gain + (e) $10 lower purchase price = $30.34. Details of each of these items are as follows: A. The new aircraft will save $2 per year in operating costs compared to the old aircraft. B. Both aircraft are depreciated using the decline-balance method, but the new aircraft will have a much lower rate of 2% compared to 14% for the old aircraft and will result in a reduction in deprecation costs this year of $0.34 [ (70 - 59) x 14% - 60 x 2%] = 0.34 C. If the airline immediately sells the old aircraft, it will generate $16 in cash, which is $13 more than if they keep the old aircraft for the rest of its life. D. If the airline immediately sells the old aircraft, it will generate a gain of $5. If they keep the old aircraft for the rest of its life, it will not generate any gain on disposal. E. The new aircraft costs $10 less than the old aircraft. Do you agree with the Controller? Should they acquire the new aircraft?

Answer rating: 100% (QA)

The detailed answer for the above question is provided below Step 1 of 4 We may perform a net present value NPV analysis to decide if the airline should buy the new aircraft This study will take into ... View the full answer