The table given below shows how, on average, the market value of a Boeing 737 has varied with its age and the cash flow needed in each year to provide a 12% return. (For example, if you bought a 737 for $19.91 million at the start of year 1 and sold it a year later, your total profit would be 18.10 + 4.20 - 19.91 = $2.39 million, 12% of the purchase cost.)
Assume airlines write off their aircraft straight-line over 15 years to a salvage value equal to 15% of the original cost.
| Start of Year |
Market Value |
Cash Flow |
| 1 |
19.91 |
|
| 2 |
18.10 |
4.20 |
| 3 |
17.01 |
3.26 |
| 4 |
15.89 |
3.16 |
| 5 |
15.11 |
2.69 |
| 6 |
14.20 |
2.72 |
| 7 |
13.58 |
2.32 |
| 8 |
12.79 |
2.42 |
| 9 |
12.27 |
2.05 |
| 10 |
11.57 |
2.17 |
| 11 |
11.13 |
1.83 |
| 12 |
10.50 |
1.97 |
| 13 |
10.13 |
1.63 |
| 14 |
9.55 |
1.80 |
| 15 |
9.23 |
1.47 |
| 16 |
8.70 |
1.64 |
|
a. Calculate economic depreciation, book depreciation, economic return, and book return for each year of the plane's life. (Leave no cells blank - be certain to enter "0" wherever required. Do not round intermediate calculations. Enter your answers in millions except for percentage values. Round your percentage answers to 1 decimal place and other answers to 2 decimal places.)
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Start of Year |
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1 |
2 |
3 |
4 |
5 |
6 |
7 |
8 |
| Economic depreciation |
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| Book depreciation |
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| Economic return (%) |
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| Book return (%) |
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Start of Year |
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9 |
10 |
11 |
12 |
13 |
14 |
15 |
16 |
| Economic depreciation |
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| Book depreciation |
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| Economic return (%) |
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| Book return (%) |
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b-1. Suppose an airline invested in a fixed number of Boeing 737s each year. Calculate the steady-state book rate of return. (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.)
Steady-state book rate of return %