MINI CASE Aerocomp Corporation As she headed toward her boss's office, Emily Hamilton, chief operating officer...
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MINI CASE Aerocomp Corporation As she headed toward her boss's office, Emily Hamilton, chief operating officer for the Aerocomp Corporation-a computer services firm that specialized in airborne support-wished she could remember more of the training in financial theory that she had been exposed to in college. Emily had just completed summarizing the financial aspects of four capital investment projects that were open to Aerocomp during the coming year, and she was faced with the task of recommending which should be selected. What concerned her was the knowledge that her boss, Kay Marsh, a street smart chief executive, with no background in financial theory, would immediately favour the project that promised the highest gain in reported net income. Emily knew that selecting projects purely on that basis would be incorrect, but she wasn't sure of her ability to convince Kay, who tended to assume financiers thought up fancy methods just to show how smart they were. As she prepared to enter Kay's office, Emily pulled her summary sheets from her briefcase and quickly reviewed the details of the four projects, all of which she considered to be equally risky. A. A proposal to add a jet to the company's fleet. The plane was only six years old and was considered a good buy at $300,000. In return, the plane would bring over $600,000 in additional revenue during the next five years with only about $56,000 in operating costs. (See Table 1 for details.) Table 1 Financial analysis of project A: Add a twin-jet to the company's fleet Page 468 Initial Expenditures Year 1 Year 2 Year 3 Year 4 Year 5 Net cost of new plane Additional revenue Additional operating costs $300,000 $43,000 $76,800 $112,300 $225,000 $168,7 11,250 11,250 11,250 11,250 11,2 Amortization Net increase in income 45,000 66,000 63,000 63,000 63,0 (13,250) (450) 38,050 150,750 94,5 Less: Tax at 33% 0 0 12,557 49,748 31,1 Increase in aftertax income ($13,250) ($ 450) $ 25,494 $101,003 $ 63, Add back amortization $45,000 $66,000 $ 63000 $ 63,000 $ 3,0 Net change in cash flow ($300,000) 31,750 65,550 88,494 164,003 126, MINI CASE Aerocomp Corporation As she headed toward her boss's office, Emily Hamilton, chief operating officer for the Aerocomp Corporation-a computer services firm that specialized in airborne support-wished she could remember more of the training in financial theory that she had been exposed to in college. Emily had just completed summarizing the financial aspects of four capital investment projects that were open to Aerocomp during the coming year, and she was faced with the task of recommending which should be selected. What concerned her was the knowledge that her boss, Kay Marsh, a street smart chief executive, with no background in financial theory, would immediately favour the project that promised the highest gain in reported net income. Emily knew that selecting projects purely on that basis would be incorrect, but she wasn't sure of her ability to convince Kay, who tended to assume financiers thought up fancy methods just to show how smart they were. As she prepared to enter Kay's office, Emily pulled her summary sheets from her briefcase and quickly reviewed the details of the four projects, all of which she considered to be equally risky. A. A proposal to add a jet to the company's fleet. The plane was only six years old and was considered a good buy at $300,000. In return, the plane would bring over $600,000 in additional revenue during the next five years with only about $56,000 in operating costs. (See Table 1 for details.) Table 1 Financial analysis of project A: Add a twin-jet to the company's fleet Page 468 Initial Expenditures Year 1 Year 2 Year 3 Year 4 Year 5 Net cost of new plane Additional revenue Additional operating costs $300,000 $43,000 $76,800 $112,300 $225,000 $168,7 11,250 11,250 11,250 11,250 11,2 Amortization Net increase in income 45,000 66,000 63,000 63,000 63,0 (13,250) (450) 38,050 150,750 94,5 Less: Tax at 33% 0 0 12,557 49,748 31,1 Increase in aftertax income ($13,250) ($ 450) $ 25,494 $101,003 $ 63, Add back amortization $45,000 $66,000 $ 63000 $ 63,000 $ 3,0 Net change in cash flow ($300,000) 31,750 65,550 88,494 164,003 126,
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