Additional planes to service expanding routes

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Reference no: EM131590137

An airline needs to add 10 additional planes to service expanding routes. It has 3 options: buy new planes, buy used planes, and lease planes. Below is the upfront investment and cash flows associated with each option. Assume that the relevant discount rate for evaluating these options is 10%.

Option 1 - Buying new planes is the most expensive option with an upfront cost of $100 million (for all 10 planes) but, because of energy efficiencies, generates only $1 million per year (for all 10 planes) in total annual maintenance and energy costs over 30 years.

Option 2 - Buying used planes is less expensive but is less energy efficient; the upfront cost is $20 million (for all 10 planes) and the annual maintenance and energy costs are $10 million per year (for all 10 planes) over 20 years.

Option 3 – Leasing planes requires no upfront investment but the annual lease payments are $8 million per year (for all 10 planes) and there are an additional $4 million (for all 10 planes) per year in annual maintenance and energy costs per year over the next 10 years.

What is the NPV of each of each of the 3 options at a 10% discount rate?

What is the equivalent annual cash flow of each of the 3 options at a 10% discount rate?

Which option should you choose and why?

Reference no: EM131590137

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