S$8$SAIT

FINANCE FOR MANAGERS

Question #$3(15$ marks$)$

Air Alberta is considering replacing the firm's regional jets with a new model, which has a total purchase price of $$15$ million.

The new jets will generate additional revenue of $$3\mathrm{.}5$ million per year for the $20$ years of the useful life of the jets. Expected added operational costs of the jets are $25\%$ of revenues.

Air Alberta expects to use the new jets for $20$ years, at which time, they would be replaced. The company estimates that all the new planes could be sold for a total of $$4\mathrm{.}7$ million $($salvage value$).$

The new regional jets have a CCA rate of