Reference no: EM132753274

Question - Virgin is considering buying ten new A380s now for $100 million each. Each is expected to start earning $20,000,000 of revenue in the first year of operation, growing by 5% per annum. Variable operating costs start at 25% of the first annual revenue, increasing by an additional 0.5% of annual revenue each year after. Annual, fixed operating costs per AC380 is $2 million p.a., starting at the same time as variable costs. The fleet is kept for 10 years of flying, after which it is sold for 40% of the initial cost, to a budget airline. In the fifth year of flying, a one-off major maintenance overhaul is required for each plane that is 5% of initial cost.

45% of Virgin capital is financed through equity which has a cost of 14% and is a 4% premium on what capital creditors earn. Calculate the discount rate, NPV and IRR of this project.