Calculate the depreciation of project, Financial Accounting

Assignment Help:

A small airline company called Mancunian Airways (MA) is considering purchasing a new jet, which will be used solely on the new route: Manchester, Paris, Madrid and back to Manchester. The new route will not compete with other existing routes operated by MA. The new airplane costs £2 million. It is estimated that the route will result in additional sales of tickets worth £1.2 million over each of the next 4 years, after which the airplane will be sold. The airplane will be depreciated down to zero over its 5 years economic life using the straightDline depreciation method (this means that you depreciate the machine by the same amount every year). After 4 years the airplane will be sold for £150,000 (we call this the "salvage value" of the airplane). The additional cost to operate the machine is 20% of sales. MA needs to add net working capital of £100,000 immediately for fuel inventory and other expenses. This capital can be recovered in full at the end of the four years. The corporate tax rate is 35%. The required rate of return is 16.55%.

Please note that, when calculating the salvage value, tax liabilities or credits are generated on the difference between the resale value and the book value of the asset. In this case the salvage value of $150,000 is below the remaining book value of the airplane (which I leave for you to calculate). The resulting capital loss creates a tax credit (i.e. you can deduct this loss from your tax payments).

(a) Please calculate the NPV of the investment. Should MA proceed with the investment?

(b) Cite two sources of risk for this investment and mention how they could be reduced or transferred to other parties.

(c) Assume now that this airplane will be used at an existing route (i.e., a route already served by MA). Provide and briefly describe one example of potential incidental effects of the investment in a new jet under this alternative scenario.

(d) The airplane will be parked in the airport in a hangar that belongs to MA. This hangar is currently empty, but another company has approached MA to rent it. Should this rent be included in the NPV calculations? Please justify your answer.

(e) The accounting team has found another legal way to calculate the depreciation of the airplane. More particularly, it suggests that you should accelerate depreciations in the beginning of the lifetime of the airplane, and depreciate less later in its life. Would that accounting change affect the NPV and for what reason? You do not need to provide actual calculations.


Related Discussions:- Calculate the depreciation of project

Which is not necessary in order for corporation to pay cash, Q. Which one o...

Q. Which one of the following is not necessary in order for a corporation to pay a cash dividend? a. Adequate cash b. Approval of stockholders c. Declaration of dividends by the bo

Public debt, effects of public debt on production, d

effects of public debt on production, d

Calculate shares no., Q. Bento, Inc. had 500,000 shares of common stock out...

Q. Bento, Inc. had 500,000 shares of common stock outstanding before a stock split occurred, and 1,500,000 shares outstanding after the stock split. The stock split was a. 2-for-5.

#titlebookeeping.., how to identify deb who to credit and who to debit

how to identify deb who to credit and who to debit

Financial and Managerial Accounting 9e, I need extra help with receivable t...

I need extra help with receivable turnover, days'' sales uncollected, and bank reconciliation.

PARTNERSHIP, CHARACTERISTICS OF PARTNERSHIP

CHARACTERISTICS OF PARTNERSHIP

Joint Audit, Impact of joint Audit on financial reporting quality

Impact of joint Audit on financial reporting quality

Prepare the income statement and balance sheet, Below is the Trial Balance ...

Below is the Trial Balance for Clay Employment Services, year ending December 31, 2011.  Previous period's information were as follows: net receivables, $290,000 and inventory, $82

Idiosyncratic risk of the stock, (a)   The market considers Intel Corp (INT...

(a)   The market considers Intel Corp (INTC) of all these stocks to be the riskiest since it has the highest beta of 1.497408. No, this measure of risk does not include the idiosyn

The balance sheet-financial statement, THE BALANCE SHEET It shows the f...

THE BALANCE SHEET It shows the financial position of the company as at the end of a given financial period. The standard requires that assets and liabilities should be classifi

Write Your Message!

Captcha
Free Assignment Quote

Assured A++ Grade

Get guaranteed satisfaction & time on delivery in every assignment order you paid with us! We ensure premium quality solution document along with free turntin report!

All rights reserved! Copyrights ©2019-2020 ExpertsMind IT Educational Pvt Ltd