# The world airline system is composed of the routes X and Y, each of which requires 10 aircraft. These routes

## Question:

The world airline system is composed of the routes X and Y, each of which requires 10 aircraft. These routes can be serviced by three types of aircraft'A, B, and C. There are 5 type A aircraft available, 10 type B, and 10 type C. These aircraft are identical except for their operating costs, which are as follows:

The aircraft have a useful life of five years and a salvage value of \$1 million. The aircraft owners do not operate the aircraft themselves but rent them to the operators. Owners act competitively to maximize their rental income, and operators attempt to minimize their operating costs. Airfares are also competitively determined. Assume the cost of capital is 10 percent.

a. Which aircraft would be used on which route, and how much would each aircraft be worth?

b. What would happen to usage and prices of each aircraft if the number of type A aircraft increased to 10?

c. What would happen if the number of type A aircraft increased to 15?

d. What would happen if the number of type A aircraft increased to 20?

State any additional assumptions you need to make.

Salvage Value
Salvage value is the estimated book value of an asset after depreciation is complete, based on what a company expects to receive in exchange for the asset at the end of its useful life. As such, an asset’s estimated salvage value is an important...
Cost Of Capital
Cost of capital refers to the opportunity cost of making a specific investment . Cost of capital (COC) is the rate of return that a firm must earn on its project investments to maintain its market value and attract funds. COC is the required rate of...

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Related Book For

## Principles of Corporate Finance

ISBN: 978-0072869460

7th edition

Authors: Richard A. Brealey, Stewart C. Myers

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