Solve q2and q3 with showing how to solve it Question 2 Score

Question 2: Score 0/4 Southwest Airlines (SWA) is planning to expand its fleet of jets to replace some old planes and to expand its routes. It has received a proposal from Boeing to purchase 112 737\'s over the next 4 vears. What annual net revenue must each jet produce to break even on its operating cost? The analysis should be done by finding the EUAC for the 10-vear planned ownership period. SWA has a MARR of 12%. purchases the jet for $30 million, has operating and maintenance costs of $3.5 million the first year, increasing 89% per year, and performs a major maintenance upgrade costing SSM at end of Year 5. Assume the plane has a salvage value at end of Year t0of S12 million. Your Answer: $10.12 M Correct Answer: $9.85 M Comment: Question 3: Score 0/4 What is the simple payback period? Assume end of year payments. EOY Cash Flow 0 -$10,000 1 4,000 Inco 2 5,000 3 2,000

Solution

2.

Time = 10 years

R = 12%

g = 8%

Present value of cost = initial investment + present value of O&M cost + present value of the upgrade cost – present value of the salvage value

Present value of cost = 30 + (3.5/(.12-.08))*(1- (1.08/1.12)^10) + 5/1.12^5 – 12/1.12^10

Present value of cost = 55.65 Million

Let, uniform annual cost = EUAC

EUAC = Present value of the cost / PVIFA = 55.65/((1-1/1.12^10)/.12)

EUAC = $9.85 Million

So, equivalent annual uniform cost will be $9.85 Million.

3.

Amount left for recovery after 2 years = 10000 – (4000+5000) = $1000

Simple payback period = 2 + 1000/2000 = 2.5 years

So, simple payback period will be 2.5 years.