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PIA is considering two alternative planes. Plane A has an expected life of four years,...

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Finance

PIA is considering two alternative planes. Plane A has an expected life of four years, will cost Rs.999 million and will produce a net cash flow of Rs.253 Million per year. Plane B has life of ten years, will cost Rs.555 million and will produce net cash flow of Rs.71 million per year. PIA plans to serve the route for eight years. Inflation in operating costs, airplane costs, and fares is expected to be zero, which means that for Option Plane A, at fourth year of its life, a similar Plane (as like Plane A), with similar cash inflows / outflows and same life span of further four years can be acquired. (Hint: Both options should be calculated for the life span of route i.e. 8 years. For Option A, the Plane A would be acquired twice, first at the start and second at 4th year. The net cash inflows / outflows must be calculated carefully to get the Net cash flow line for 8 years). Airline required rate of return is 0.5%. Compare both proposals for the life span of route and explain by how much the value of airline increase would if it accepted the better project (plane)? You may use NPV analysis for this purpose.

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