What does the payback period calculation mean

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Reference no: EM132006627

SSA airlines is a large airplane maker. It recently built the T123. It can carry 500 passengers on two levels. Initial project investments were $13B. Assume that the initial investment was paid on Dec 31, 2010. Assume that SSA will produce 60 aircraft per year for five years. Each aircraft will be sold for $230M and total operating costs are 75% of revenues. Assume that revenues and costs occur at year-end with the first revenues (and costs) occurring on Dec 31, 2011. What is the NPV of the project if SSA’s cost of capital is 11%?

A) Calculate the NPV as of Dec 31, 2010. Ignore taxes and assume that there are no terminal year cash flows.

B) What is the payback period for the SSA investment outlined above? What does the payback period calculation mean?

C) What is the Profitability Index as of Dec 31, 2010 for the SSA investment?

D) SSA’s CFO wants you to provide a recommendation – but based on only one of the three sets of analysis above (either NPV, Payback or Profitability Index). Which method do you choose? Why?

Reference no: EM132006627

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