FastJet Airlines Corp. is considering the cash purchase of four new airliners for $20,000,000 each.  These airplanes will save the company a total of $300,000 per year in operational expenses compared to its current fleet. However, if the new airplanes are purchased, the maintenance contract with the seller will increase in total from $50,000 per year to $100,000 per year. 

Each airplane has a useful life of ten years. They will have no resale value at the end of their useful lives. Four older airplanes will be immediately decommissioned and sold for cash of $18,000,000 each in three year's time. 

The company's discount rate is 8% per year. Its income tax rate is 20%. Income taxes only apply to operational and maintenance expenses. Assume operational, maintenance, and income tax expenses are paid at the end of each year.

Required: Determine if the new airplanes should be purchased. State any additional assumptions you make. 

Answer rating: 100% (QA)

Should FastJet Airlines Purchase the New Airliners Analysis We can analyze this situation using a Net Present Value NPV approach to determine if the p... View the full answer