1) Ghost Squadron Historical Aircraft, Inc. (GSHAI) is considering adding a rare World War II B-24 bomber to its collection of vintage aircraft. The plane was forced down in Burma in 1942, and it has remained there ever since. Flying a crew to Burma and collecting the wreckage will cost $100,000.
Transporting all the parts to the company's restoration facility in Texas will cost another $35,000. Restoring the plane to flyable condition will cost an additional $600,000 at t0 GSHAI's operating costs will increase by $40,000 a year at the end of years 1 through 7 (on top of the restoration costs).
At the end of years 3 through 7, revenues from exhibiting the plane at airshows will be $70,000. At the end of year 7, the plane will be retired. At that time, the plane will be sold to a museum for $500,000.
The plane falls into the MACRS depreciation class for seven-year assets. GSHAI's combined federal and state income tax rate is 35 percent, and the company's weighted average cost of capital is 12 percent. Calculate the NPV and IRR of the proposed investment in the plane.
2) Kendrick Duckworth has entrusted financial analyst Flower Belle Lee with the evaluation of a project that involves buying a new asset at a cost of $90,000. The asset falls under the MACRS three-year class and will generate the following revenue stream:
|
End of Year
|
1
|
2
|
3
|
4
|
|
Revenues ($)
|
50,000
|
30,000
|
20,000
|
20,000
|
The asset has a resale value of $10,000 at the end of the fourth year. Duckworth's discount rate is 11 percent. The company has an income tax rate of 30 percent. Should Flower recommend purchase of the asset?