Problem - Based on your teams determination of the number of airplanes needed, ExpressJet is considering multiple options for acquiring the Embraer 170 airplanes at a price of $10.9 million each. The executives in charge of capital acquisitions at ExpressJet are relying on you to show and explain which option will place the company in the best financial position based on your Net Present Value calculations. In the past, all acquisitions have been in cash. However with the current trend of the company, the options being considered are as follows:
- ExpressJet will borrow the funds necessary on a 5-year note from Bank of America. This will cause the marginal tax rate to be 35%
- ExpressJet will lease the planes for 10 years from LeaseCo. This will be an operating lease. This will cause the marginal tax rate to be 35%.
Calculate Net Present Value for all the scenarios as compared to a cash purchase. Use the below data to fill in the spreadsheet.
- Cost of new equipment: $10,900,000
- Expected life of equipment in years: 30
- Disposal value in 5 years: $1,090,000
- Lifetime miles per plane: 1,575,000,000
- Annual miles per year: 52,500,000
- Number of workers needed: 3
- Annual hours to be worked per employee: 2,000
- Earnings per hour for employees: $35
- Annual health benefits per employee: $2,000
- Other annual benefits per employee-% of wages: 15%
- Cost per Passenger Seat Mile: $0.06
- Other variable costs per Seat Mile: $0.10
- Costs to purchase cans-per can: $0.50
- Required rate of return: 11%
- Tax rate: 35%
- Monthly lease payments: $95,000
- Lease term: 10 years
- Monthly Note payments: ($203,208.91)
- Note Term: 5 years
- Down payment: $1,000,000
The team Excel Spreadsheet with the key calculations will be due at the end of this week.