Based on your teams determination of the number of airplanes needed, ExpressJet isconsidering multiple options for acquiring the Embraer 170 airplanes at a price of $10.9million each
Based on your teams determination of the number of airplanes needed, ExpressJet isconsidering multiple options for acquiring the Embraer 170 airplanes at a price of $10.9million each. The executives in charge of capital acquisitions at ExpressJet are relyingon you to show and explain which option will place the company in the best financialposition based on your Net Present Value calculations. In the past, all acquisitions havebeen in cash. However with the current trend of the company, the options beingconsidered are as follows:ExpressJet will borrow the funds necessary on a 5-year note from Bank ofAmerica. This will cause the marginal tax rate to be 35%ExpressJet will lease the planes for 10 years from LeaseCo. This will be anoperating lease. This will cause the marginal tax rate to be 35%.Calculate Net Present Value for all the scenarios as compared to a cash purchase. Usethe below data to fill in the spreadsheet.Cost of new equipment: $10,900,000Expected life of equipment in years: 30Disposal value in 5 years: $1,090,000Lifetime miles per plane: 1,575,000,000Annual miles per year: 52,500,000Number of workers needed: 3Annual hours to be worked per employee: 2,000Earnings per hour for employees: $35Annual health benefits per employee: $2,000Other annual benefits per employee—% of wages: 15%Cost per Passenger Seat Mile: $0.06Other variable costs per Seat Mile: $0.10Costs to purchase cans—per can: $0.50Required rate of return: 11%